What are the disadvantages of PPF?

The following are the disadvantages of the Public Provident Fund: Lock-in Period: One of the biggest disadvantages of PPF is its lock-in period of 15 years. ... Low Interest Rate: The PPF interest rates are subject to annual revisions by the government. ... Liquidity: PPF is not a liquid investment. More items...

PPF account: Why you should not invest in public provident fund; top 5 reasons (2024)

PPF account: Public Provident Fund (PPF) is a popular long-term savings scheme in India. At present, it offers a 7.1% interest rate effective 1 April 2023. Like every other savings scheme, PPF also has some disadvantages that you should consider before investing.

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 circ*mstances:

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.

How to be a value investor when market is at peak

Why global stocks were a big miss for PPFAS MF’s Rajeev Thakkar

What you should do after an income tax mismatch

In charts: How Indian women are climbing up the loans ladder

Here is how women can inspire financial inclusion for themselves

The key financial laws that every woman should know

What trending funds mean and why investors should be wary of them

Buy your car with a credit card, save 4-11% on costs

Mutual fund investments: How NRIs can save on taxes

Why it is necessary to adopt risk management for mutual fund investments

Explore Premium

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.

MoreLess

Published: 19 May 2023, 02:16 PM IST

FAQs

Investing in PPF is a good starting point for your investments, but hastily allocating all your savings to it each year or prioritising it over other potentially better investment options could be detrimental in the long run.

The following are the disadvantages of the Public Provident Fund:

Lock-in Period: One of the biggest disadvantages of PPF is its lock-in period of 15 years. ...
Low Interest Rate: The PPF interest rates are subject to annual revisions by the government. ...
Liquidity: PPF is not a liquid investment.

More items...

Risk factor: Since PPF is backed by the Indian government, it offers guaranteed, risk-free returns as well as complete capital protection.

PPF as a Pension Tool

As far as the different pension plans or annuity products are concerned, the pension income is taxed according to the income tax slab. But, in the case of PPF, there is no tax to be paid. Thereby, it can be considered better than other pension schemes/plans.

The 15-year lock-in period might not suit those who require more accessible funds. Fixed Interest Rate: While the fixed interest rate is an advantage for stability, it can also be a disadvantage when market interest rates are higher. In such scenarios, other investment options might offer better returns.

If you are looking for a low-risk investment option with a guaranteed return and a shorter time horizon, a fixed deposit might be a better option. If you are looking for a long-term investment option with the potential for higher returns, a Provident Fund might be a better option.

You can withdraw the money partially after completing 5 years from the account's opening date.

Delaying deposits can lead to significant financial loss as interest is calculated based on the lowest balance between the 5th and end of each month.

Yes, an NRI can have a PPF account in India. However, the PPF account must have been opened while the person was still a resident of India. An NRI can only have a PPF account if they opened it as an Indian resident and prior to becoming an NRI.

The answer is no to whether PPF interest is taxable or not. PPF falls under the exempt- exempt-exempt (EEE) category. This means, the principal amount, the interest earned and the maturity amount of PPF is completely tax-free.

As with any product exposed to the elements, PPF is susceptible to wear and tear over time. As time progresses, PPF may experience visual problems, including yellowing, peeling, and a decrease in overall aesthetic quality due to factors such as UV exposure and the buildup of contaminants.

Yellowing is the most common Paint Protection Film flaw. Over time and extended exposure to direct sunlight and various weather elements, the paint protection film may, over time, start to yellow. This is especially noticeable on white and brighter colored cars.