Why Should You Not Invest in a Public Provident Fund (PPF)?

Public Provident Fund (PPF) is India's widespread and preferred long-term tax-saving scheme. It is often seen as a post-retirement investment option. The PPF account offers a 7.1% interest rate, which sounds higher than normal bank FD and other investment options. 

However, in recent years the interest rate on the PPF scheme has decreased excessively. Here are the top 5 disadvantages of investing in PPF. 

Reasons to Stop Investing in Public Provident Fund (PPF) Account

1. Lower Interest Rate Than EPF

The interest rate provided under the PPF scheme is comparatively lower than that offered under Employee Provident Fund Scheme. Therefore, if you are salaried, it's better to opt for EPF instead of a PPF account. At present, EPF provides an 8.15% interest rate, while PPF provides a 7.1% interest rate. 

2. Long Lock-in Period

PPF accounts take 15 years to mature, making them unsuitable investment options for people willing to get short-term returns. However, the Public Provident Fund is a suitable alternative if you aim for long-term investment. Another notable thing about PPF is that the interest rate on this investment scheme is declining every year. Therefore, the government may lower the offered interest rate again in the coming years. 

Read: Value Investing vs. Growth Investing 

3. Maximum Deposit Limit

The maximum investment limit on PPF is up to Rs 1.5 lakh a year. The government hasn't raised the deposit limit for PPF account holders for many years. Investors willing to invest more money under the provident fund can prefer investing in VPF or Voluntary Provident Fund scheme. They can invest up to Rs 2.5 lakh in VPF account without incurring additional tax liability. 

4. Strict Rule for Early Withdrawal

There are very strict rules for early withdrawals in the PPF account. After completing five years of investment, investors are allowed one withdrawal per financial year. Additionally, the premature account closure is applicable after five years from the commencement of investment with the applicability of a 1% interest deduction.

Read: Why People Invest in Bonds

5. No Premature Closure Allowed

According to Public Provident Fund guidelines, the premature closure of a PPF account is only allowed under the following circumstances:

1. There is a life-threatening disease to the account holder, spouse, and children. 

2. The account holder needs money for the higher education of their or their dependent’s children.

3. The account holder requires to change their residency status. 

In these cases, the account holder is allowed for premature closure; but the bank or post office will deduct 1% interest from the date of account opening to the date of account closure. 

Therefore, if you do not want to continue investing in a PPF account and have already invested enough money but do not require instant cash, keep the account open by investing Rs 500 annually. 

Conclusion

Public Provident Fund or PPF is an adequate investment option for those not paid a salary and willing to make long-term investments for tax benefits. If you fall in this category, investing in a PPF account can be worth it. But if you are already a salaried person, it's better to opt for EPF or VPS because they will offer higher returns and better tax benefits than the PPF. 

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