How I use PPF for my retirement

The benefits are too good to ignore!

Hi!

I mentioned in a previous post how I use EPF to create a baseline for my retirement, or rather, how it’s created for me by the government. Here’s another debt instrument the government provides that has benefits which are too good to ignore - the Public Provident Fund (PPF).

How it works

PPF can be opened with any nationalized bank, so I opened mine with SBI. I deposit Rs. 1.5L (which is the maximum) each year, and I get interest deposited at the end of each financial year. It’s that simple.

The interest rate is declared by the government for each quarter. The interest for a month is computed on the lowest balance between the end of 5th day and last day of the month, and the interest for the twelve months is deposited at the end of the financial year.

The PPF has a lock-in of 15 years, and then I can choose to extend the duration by blocks of 5 years.

Once the account is mature, I can withdraw the complete amount.

Taxation

Contribution

Contributions to PPF can be deducted under Section 80C, but it doesn’t count for me because the Rs. 1.5L limit for that section is covered by my EPF contribution.

Interest

Interest for PPF is tax free. No funda like EPF’s taxation rules for contributions beyond Rs. 2.5L.

Withdrawal

After the 15 year lock in, I can withdraw the complete amount tax free.

There are options to extend the lock-in by blocks of 5 years. In that case, I can continue to contribute as normal, or leave it alone without adding money. Withdrawal after these extensions are also tax free.

Why I choose to invest in PPF

PPF has some great advantages which makes it a no-brainer for me to invest. It only has a 15 year lock-in, compared to EPF’s withdrawal where I need to be unemployed or reach 58 years of age to withdraw. NPS also has a lock-in till 60, otherwise the terms for withdrawal are terrible.

PPF acts as a simple compounding instrument, so it earns a larger interest the longer I keep it open. Its simplicity removes the headache of trying to time my investments or withdrawal, other than invest as much, as soon as possible.

The interest earned from my PPF contributions are tax free, which is awesome because unlike FDs, which are taxed each year, the PPF corpus can compound without taxes eating away my interest. The interest rate is also higher than FDs, which is a double-advantage.

The interest is guaranteed to be paid out by the Government of India, so until there is a catastrophe, I am confident of receiving the interest on time.

Withdrawal of the PPF corpus is also tax-free, which is again great for my corpus.

This taxation policy is not likely to change, given PPF is used as the primary small savings instrument for the majority of low-income workers in India.

How PPF fits into my portfolio

I consider PPF to be a part of my debt portfolio. Like I mentioned in my post on EPF, I will not over-invest my debt portion into PPF because it is illiquid for 15 years. For now it doesn’t form a majority of my debt portfolio so I invest the maximum Rs 1.5L. It may change in the future if say, I lose my job, then I can keep the account alive by investing the minimum Rs 500 per year.

PPF is a long-term savings instrument so I have tagged it for retirement. I plan to keep it alive with 5 year extensions for as long as possible. It is a buffer in case things go south with the rest of my corpus, such as equity markets undergoing a recession or a debt market crash. I can withdraw from the PPF corpus once a year (after the 15 year lock-in) as per its rules, so I can use it for my expenses while I wait for the equity or debt market to recover.

Wrapping up

PPF is a debt instrument that’s a no-brainer for me to invest in. I plan to invest early and regularly, and keep it alive for as long as possible for those sweet compounding gainzz.

Until next time!