As the financial year comes to an end, employees receive HR emails asking them to submit their tax-saving investment proofs. One popular option for tax-saving investment is the Public Provident Fund (PPF). However, before making any investment decisions, it is essential to consider various factors such as interest rates, liquidity, lock-in periods, and overall financial planning.
Firstly, it is important to understand that the interest rate on PPF is not a guaranteed rate forever. The current interest rate is benchmarked to the 10-year government bond yield, which means that the interest rate can fluctuate every year depending on the benchmark yield. For instance, the current interest rate of 8.6% is 0.25% above the average benchmark yield in the previous financial year. Therefore, it is necessary to consider the fluctuating interest rates while investing in PPF.
Secondly, investing in PPF is not the only option available for tax-saving purposes. Salaried employees already contribute towards the Employee Provident Fund (EPF), which is a tax-saving investment. Therefore, employees need to consider the amount they contribute towards EPF while deciding the amount they need to invest in other tax-saving instruments. Over-investing in debt instruments like PPF can negatively affect long-term financial planning.
Thirdly, the lock-in period for PPF is 15 years, which is quite long. While it is true that partial withdrawals are allowed after five years, the withdrawn amount is taxable. Moreover, even after completing five years, only 50% of the balance amount is available for withdrawal, which is taxable. Therefore, PPF scores low on the liquidity aspect, and investors need to plan their investments accordingly.
Furthermore, taking a loan against one’s own investment is not a sound financial decision. Although PPF allows for loans, the interest rate on the loan is 2% higher than the interest earned on the investment. This means that one would have to pay more interest on the loan than the interest earned on the investment, which is not financially beneficial.
In conclusion, while investing in PPF is a popular option for tax-saving investments, it is important to consider various factors such as interest rates, liquidity, lock-in periods, and overall financial planning. As salaried employees already contribute towards EPF, over-investing in debt instruments like PPF can negatively affect long-term financial planning. It is important to assess one’s financial situation and plan investments accordingly. Additionally, taking a loan against one’s own investment is not a wise financial decision. Therefore, it is crucial to research and understand all aspects of tax-saving investments before making any investment decisions.