PPF vs Debt Mutual Fund: Investors often use Public Provident Fund (PPF) and long-duration debt mutual funds as part of their retirement portfolio. While PPF is non-market-linked, a long-duration debt fund may hold a minuscule part of equity. However, PPF and debt funds are both significantly safer investment options compared to hybrid and equity mutual funds. 

However, when it comes to taxation, PPF provides a tax-free corpus due to its exempt-exempt-exempt (EEE) status.

On the other hand, debt mutual funds are taxed as per the investor’s tax slabs. Here, we will calculate which of the two may provide a higher corpus on a Rs 1,50,000 yearly investment. 

PPF interest rate

PPF provides an interest rate of 7.1 per cent. A PPF account can be opened in a bank or a post office. The interest rate is reviewed after every 3 months. 

PPF’s exempt-exempt-exempt status    

Investment up to Rs 1.50 lakh in a financial year under Section 80C of the Income Tax Act, 1961, provides tax relaxation to old tax regime followers.

On the other hand, the interest earned and the corpus created are also tax-free. 

PPF investment limit

The maximum investment allowed in PPF in a financial year is Rs 1,50,000. The minimum is Rs 500. The same amount is required to keep the PPF account active. 

Debt mutual fund performance

As far as a long-duration debt fund’s performance is concerned, 8 per cent annualised growth in the long term can be considered good.

If we look at the performance of the top long-duration debt fund in 10 years, ICICI Prudential Long Term Bond Fund – Direct Plan tops the chart with an 8.13 per cent annualised return (CAGR) and a 7.81 per cent annualised SIP return. 

Income tax on debt mutual fund returns

Debt mutual fund gains are taxed as per the investor’s tax slabs, irrespective of the holding period.

However, this rule will apply for debt mutual funds purchased after April 2023.

Those bought before that will be taxed as per short term capital gains (LTCG), where the holding period is 24 months and they will be taxed as per slabs, and long term capital gains (LTCG), where the tax rate is 12.5 per cent.   

Under the new tax regime, if returns from debt mutual funds are your only source of income, you will not be taxed on an annual income up to Rs 12 lakh after a maximum tax rebate of Rs 60,000 under Section 87A of the Income Tax Act.

Calculations for story

We will calculate the estimated 15-year post-tax corpus from PPF and a long-duration debt fund on an annual Rs 1.5 lakh investment in each.

While we are calculating the PPF return at a 7.1 per cent interest rate, we will take 8 per cent as the annualised return for the debt mutual fund calculation. 

Corpus from PPF investment on Rs 1.50 lakh/year investment 

In 15 years, the total investment will be Rs 22,50,000, the estimated interest will be Rs 18,18,209, and the estimated corpus will be Rs 40,68,209. The entire corpus will be tax-free.

Corpus from debt mutual fund investment on Rs 1.50 lakh/year investment 

In 15 years, the total investment will be Rs 22,50,000, estimated capital gains will be Rs 21,48,642, and the estimated corpus will be Rs 43,98,642.

Income tax on Rs 21,48,642 capital gains 

If we assume that Rs 21,48,642 is the only annual income, it will be taxed at a 25 per cent tax slab as per the new tax regime, where the estimated tax will be Rs 2,46,647.

It means that the post-tax estimated corpus will be Rs 19,01,995.

However, if the investor follows the old tax regime, the estimated tax will be Rs 4,75,376, and the estimated post-tax corpus will be Rs 16,73,266.

What if investor falls in 30% tax slab?

Let’s assume one more condition. Here, we are assuming that the investor has an annual income of Rs 10 lakh (non-salaried individual), and capital gains from debt fund returns are Rs 21,48,642.

So, the cumulative annual income will be Rs 31,48,642.

Let’s see how much tax will be applicable to them. 

In the new tax regime, the estimated tax will be Rs 5,45,576.

Under the old tax regime, the estimated tax will be Rs 7,87,376.

(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)