Individuals are always on an outlook to find investment options providing good returns without the high risk and at the same time assisting in saving taxes. Keeping in mind the needs of the people the government introduced the Public Provident Fund (PPF) in 1968 which is a saving-cum-tax- saving instrument that yields a healthy interest at a lower risk. The central government guarantees the scheme thus it is the safest avenue available to Indians to build a corpus making it a popular option.
While the organized sector could reap the benefits of Employee Provident Fund or EPF, PPF was directed at the unorganized sector, private sector, and businessmen. However, a person with an EPF account is eligible to open a PPF account.
Any person who is a resident of India is eligible to open a PPF account. Parents are allowed to open PPF accounts on behalf of minors. Opening a PPF account for your minor child can be beneficial for several reasons. However, NRIs (Non-resident Indians) are not allowed to open new PPF accounts. Though, they are allowed to continue their existing PPF accounts up to its 15 years maturity period.
PPF Interest Rates are set by the Central government. Earlier they were fixed each year but are now set on a quarterly basis (every three months). This change happened from FY 2017-18 onwards. The current PPF interest rates offered by all banks are 7.9% as applicable from October 1st, 2019.
There are various benefits of investing in the Public Provident Fund Scheme. Some of which are discussed below:
- You can yield good returns from small savings- The PPF interest rate has historically been around 7.6% to 8% which is higher than many other investment schemes. It tends to move slightly higher or lower depending on the overall interest rate scenario in the economy. The PPF allows you a lot of flexibility in the investment amount. You can open an account with as little as Rs. 100. You have to invest a minimum of Rs. 500 and the maximum investment can be of Rs. 1,50,000 annually. These investments can be made in a lump sum amount or a maximum of 12 installments in a year. Several options are available for depositing the amount such as cash, cheque, PO, DD, online funds transfer.
- You get risk free guaranteed returns- One of the most significant PPF account benefits is that it is entirely risk- free as it is backed by the Central government. The returns are also guaranteed by the government. What’s more, is that the funds in your account cannot be attached by even a court order to pay off debtors.
- You get a tax break- The great thing about a PPF is its exempt-exempt-exempt (EEE) tax status, one of the only investments in India to enjoy such an advantage. The amount you invest up to Rs. 1,50,000 is deductible from your taxable income, the interest you earn is non-taxable and the maturity amount you get after 15 years is also tax-exempt. This makes it one of the most tax-efficient investments.
- You can partially withdraw money- Although the PPF has a 15-year lock-in period, you have options to make use of the funds in your account. From the seventh year, you can make partial withdrawals from your account. Besides, partial withdrawals, you can prematurely close your PPF account if you need the funds for severe medical treatment or for higher education.
- You can avail loan facilities- You can get loans against your PPF account from the 3rd to the 6th year of the account opening. The maximum amount of loan that can be availed against PPF accounts is 25% of the balance at the end of the 2nd financial year preceding the year in which the loan was applied for. You must repay the loan in 36 months, the rate of interest of which is 2% higher than the interest you earn.
- There is the flexibility of tenure- After 15 years when your PPF Account matures you have two options. One, you can withdraw the whole amount including the interest or you can extend the tenure in blocks of 5 years.
- Mobility is not an issue- Individuals can open a PPF account at any branch of State Bank of India, its associated banks, certain nationalized banks, and the post office. Private banks like ICICI Bank and HDFC Bank and even post offices also provide this service. If shifting residence, within the same city or to another city, the account can be transferred to a bank or “account office” that the account holder chooses.
It should be noted that one should deposit the investment amount by the 5th of every month. The reason for that is the interest calculation – all amounts which are available in the PPF account before the 5th of a particular month are considered for calculating the interest. If you are looking to maximize your returns, the period of investment can play a huge role. An amount deposited after the 5th of the interest is not going to yield interest for that month.
As PPF is meant as an aid for the post-retirement years, the Government makes it very lucrative. The interest rate offered on PPF is higher than that offered by the Government for 10 year Government bonds. As a result, returns from PPF will never be less than the prevailing interest rates.
PPF suits those investors who do not want volatility in returns akin to the equity asset class. However, for long-term goals and especially when the inflation-adjusted target amount is high, equity exposure can also be considered. Diversifying one’s savings in PPF and equities would serve the purpose rather than relying entirely on any one of them. So as a good investment option one should invest at least some amount in PPF for safe tax-free returns.