PPF — India's most tax-efficient long-term saving instrument
Public Provident Fund is a Government of India savings scheme open to any Indian resident. The current interest rate is 7.1% per annum, compounded annually and revised quarterly by the Ministry of Finance. PPF is one of the few schemes that qualifies as fully EEE — Exempt at contribution (deductible u/s 80C up to ₹1.5 lakh), Exempt at accrual (interest is tax-free) and Exempt at withdrawal (maturity amount is tax-free).
Key rules
- Minimum deposit ₹500 per year; maximum ₹1,50,000 per year (across all PPF accounts you hold).
- Initial lock-in: 15 years from financial-year-end of the year of opening.
- After 15 years, you can extend in 5-year blocks indefinitely — with or without further contributions.
- Partial withdrawal allowed from year 7. Premature closure allowed in year 5+ for medical or educational reasons (with a 1% interest penalty).
- One person can hold one PPF account in their own name plus accounts as guardian for minor children.
How the PPF maturity is computed
At the start of each year, you deposit some amount up to ₹1.5 L. At the end of the year, the entire balance (opening balance + new deposit) earns interest at the prevailing rate. That interest is added to the balance and itself earns interest the next year. The compound formula across n years of fixed annual deposit P at rate r is:
F = P × (((1 + r)n − 1) / r) × (1 + r)
₹1.5 lakh per year for 15 years at 7.1% gives a maturity of about ₹40.68 lakh — invested ₹22.5 L plus compound interest of ₹18.18 L.
PPF vs ELSS — when to pick which
Both qualify for 80C deduction but the trade-offs differ. PPF: 7.1% guaranteed by the Government, fully tax-free, 15-year lock-in. ELSS (equity-linked saving schemes, tax-saving mutual funds): 10–14% historical equity returns, 3-year lock-in, 12.5% LTCG on gains above ₹1.25 lakh per year.
Most planners suggest both. Use PPF for the conservative debt-allocation portion of your 80C and ELSS for the equity portion — together they max out the ₹1.5 lakh annual cap with a built-in asset allocation.
Best practices
- Deposit before the 5th of each month — interest is calculated on the lowest balance between the 5th and end of month, so depositing on the 1st earns full-month interest.
- For lump-sum 80C, deposit ₹1.5 lakh on April 1 to maximise compounding for the full financial year.
- Open the account at a post office or a bank that supports online PPF (SBI, HDFC, ICICI) — online deposits are instant and timestamped.
- Always extend after 15 years. The rules are unchanged but compounding has now reached escape velocity — years 16–25 add as much in absolute rupees as years 1–15.