Top 5 reasons not to invest in PPF

1)Lower than the EPF interest rate

The PPF interest rate is lower than the Employee Provident Fund (EPF) interest rate, making it less attractive for salaried employees who can allocate higher amounts towards EPF through Voluntary Provident Fund (VPF) for better returns and tax benefits. The current EPF rate is 8.15% while the current PPF rate is 7.1%. Many salaried people use PPF to reduce their taxable income. Vinit Khandare, CEO & Founder, MyFundBazaar suggested that salaried persons can obtain comparable tax benefits and higher interest by designating larger sums to Provident Fund through VPF rather than investing in PPF. 

2) Long lock-in period

It takes 15 years for the PPF account to mature. People who actually wish to invest for a very long time are better suited for this strategy. Amit Gupta, MD, SAG Infotech said PPF's long lock-in period of 15 years, makes it unsuitable for short-term needs. “Investors might have to consider other solutions if they have any immediate needs," said Khandare. 

Also Read: Disadvantages of fixed deposit: Nine reasons not to invest in bank FDs

3) Fixed maximum deposit limit

The most you can put into a PPF account is set at Rs. 1.5 lakh. For the past few years, the government has not raised this restriction. As per Khandare, for paid workers who want to invest more money, the VPF is a preferable alternative because up to ₹2.5 lakh can be deducted from income without incurring any additional tax liability

“The fixed maximum deposit limit which has not been increased for several years, limits the investment potential for those who wish to invest higher amounts," said Amit Gupta.

Also Read: Senior Citizen Savings Scheme: 5 disadvantages of investing in SCSS—interest rate to fixed tenure

4) Strict early withdrawal rules

Premature withdrawal from the PPF has strict conditions and is limited to one withdrawal per financial year after five years, excluding the year of account opening. Premature closure is allowed only after five years, subject to specific conditions and a 1% interest deduction. Amit Gupta said that account holders can keep the account alive by depositing ₹500 annually if they don't wish to continue investing.

5) Early premature closure not allowed

According to PPF regulations, early closure is permitted under the following circumstances:

1)The account holder, their spouse, or their dependent children have a life-threatening illness.

2)The account holder's or their dependent children's higher education.

3) The account holder's change in residency status

Additionally, in the event of an early closure, 1% interest will be taken from the date of account opening. Instead of requesting an early closure, PPF account holders who do not want to continue investing in the plan can keep it open by making a deposit of ₹500 each fiscal year, explained Khandare.

However, PPF continues to be one of the greatest investment and tax-saving plans for those who are not paid a salary.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Published: 19 May 2023, 02:16 PM IST