A Public Provident Fund account (PPF) is a long-term tax-saving investment scheme that offers a fixed interest rate and tax-exempt returns. It’s a government-backed savings scheme with guaranteed returns.
PPF account is as famous in Indian households as fixed deposit. Investors, regardless of their risk appetite, can keep aside a certain amount in a PPF account to gradually build wealth.
Some of the common reasons to have a PPF account are:
You can earn stable returns on your PPF account and take advantage of tax benefits under Section 80C. As of FY22, the interest rate on PPF is 7.1%.
Before creating a PPF account, here are some things you need to know.
Any Indian resident can open a PPF account in a bank or a post office. You can only have one PPF account but you can transfer it from one bank to the other or to the post office if needed.
You can also open a PPF account for your children and manage it until they are old enough.
Once you open an account, you must invest between INR. 500 to INR. 1,50,000 in one financial year. Any amount beyond INR. 1,50,000 won’t be considered for tax savings under Sec 80C.
Your investment will be locked for 15 full financial years and you will continue to earn compound interest on it. However, you can withdraw a partial amount in intervals of 5 years.
Let’s elaborate some more.
You need to invest anywhere between INR. 500 to INR. 1,50,000 in a financial year on a monthly, quarterly, or annual basis as you get up to 12 installments per year. There’s a small penalty if you miss an installment in a financial year.
PPF account has a tenure/lock-in period of 15 full financial years. This means- if you start your account on, let’s say, 1st Oct 2022, your 1st financial year will start from 1st April 2023.
Yes, you will earn returns on the investment from 1st Oct 2022 to 1st April 2023. But the financial year will begin on 1st April 2023.
You can withdraw a partial amount (50% of the total available balance) only after the completion of 5 years. Until then, the investment will be locked. Though you can claim a loan against your PPF account.
Since your amount is locked-in, you can apply for a loan against your PPF account.
There are two rules to claiming the loan:
The interest on this loan will be 1% + the PPF interest rate. If the PPF interest rate is 7.1%, the loan interest rate will be 8.1%.
PPF investments up to INR. 1,50,000 are eligible for tax benefits under section 80C.
However, if you have any other investment under section 80C, then you may not be able to claim the tax benefit on PPF.
If PPF is your only investment under Section 80C, then you can take advantage of Exempt-Exempt-Exempt (EEE) i.e. The amount invested in PPF, the interest earned, and the final corpus withdrawn at the time of maturity are all exempt from tax.
After the full 15 financial years, you can either withdraw the full amount or extend the account in blocks of 5 years,
In that case, you will be able to withdraw the balance that was available before the extension was locked. So if you had INR. 30,00,000 after 15 years and you extend the account, you can only withdraw 30L. Any further investment will be locked. Also, you can only make one withdrawal in each financial year.
In case you need emergency funds, there are 2 cases in which you can terminate the account.
For the medical emergency of a life-threatening disease of you or your parents/spouse/children.
For higher education of children.
There are 2 simple tips that can maximize your PPF account returns.
If you invest a large amount once a year in your PPF account, we recommend doing it at the beginning of the year (Preferably before the 5th of April).
Most people invest a large amount at the end of the financial year to get tax benefits. However, the interest on the amount is calculated throughout the year. You can take advantage of maximum interest if you invest when the financial year begins.
If you are planning to schedule monthly investments, prefer to do it before the 5th of each month.
The balance considered for calculating interest on the PPF account is calculated on - the balance in your PPF account on the 5th day of the month and the last day of the month - whichever is lower.
For example, if your balance is INR. 2,00,000 and you invest INR. 50,000 on the 6th of a month, you will earn interest only on INR. 2,00,000 and not on INR. 2,50,000. But if you invest that INR. 50,000 before the 5th of that month, then your interest will be calculated on INR. 2,50,000.
Having a PPF account is a disciplined way of building wealth for the future. You can open an account online and keep transferring money into it.
It’s a secure investment with stable returns and tax benefits. Continue keeping some money aside for the future and forget about it until maturity. By the time of maturity, you will have a large corpus ready.
Don’t forget to invest money in your PPF account either before the 5th of April each year or before the 5th of each month for monthly installments. That way, you will maximize the returns on your investment.
To know more about long-term investments, give VNN Wealth experts a call or write to us. Get all your queries answered with a thorough portfolio analysis.
