The Public Provident Fund (PPF) has been one of the favourite investment destinations for decades. It is backed by the Central government and therefore it offers risk-free guaranteed returns. As a long-term investment tool, it can be used by all including salaried, professionals, home-makers, self-employed, and even those who are not part of the workforce.
PPF account can be opened in a designated post office or a bank branch. It comes with an initial lock-in period of 15 years. The interest on PPF is compounded annually.
PPF falls under the Exempt-Exempt-Exempt (EEE) category and comes with an additional benefit for the salaried class. A PPF account earns tax-free interest. This makes the maturity amount tax-exempt when you exit at the 15th year or later. Also, the return here is assured and over and above the FD rates. The salaried class can claim for tax waiver under section 80c of the IT Act, 1961. This makes the PPF an attractive tax saving option for them. So, if you are planning to park your money in a PPF account, it is never going to be a bad deal.
"The deposits made can be claimed as deduction under Section 80C up to Rs. 1,50,000 in a financial year. The interest rate of PPF is determined by the Central Government on a quarterly basis which is also tax-free. Therefore, an individual looking for a risk-free assured return backed by the government should invest in a PPF," Hans Raj Chugh, a member of the ICAI since 1991, and Insolvency Professional, said.
However, PPF accounts come with a major limitation. As per the rule, an individual can open only one PPF account and can deposit a maximum of Rs 1.5 lakh every year. He/she is allowed to make only 12 transactions in a calendar year. To keep the account running, one must deposit a minimum of Rs 500 in a year.
Over time, PPF has been favourite among parents who open accounts in the name of their minor kids to accumulate savings to meet long-term requirements. There is no minimum age defined by the government for investment in PPF. ALso, there is no upper age limit for opening a PPF account.
"The PPF interest rate is reviewed and announced by the central government every quarter. It aims to provide higher interest than regular accounts maintained by various commercial banks. The major benefits of investing in PPF are that it fetches high but stable return; investors can avail loan against the investment amount; and annual investment in PPF upto rs 1.5 lakh can be claimed for tax waiver under section 80C of the Income Tax Act of 1961," Sachin Gupta, CEO, Share India, said.
PPF interest rate calculation
The Central government holds the right to decide the interest rate. Sachin said that the interest rate is not fixed. It is linked to the 10-year government bond yield and every quarter's rate depends on the average bond yield in the previous quarter. The rate is decided at the beginning of a quarter.
At present, interest on PPF is calculated monthly but it is credited on the last date of the financial year.
The interest is calculated on the minimum balance in an account between the 5th and the end of every month. This means, if an individual deposits money in a PFF account after the 5th of that month, he/she will get interest on the previous month’s balance. Depositing before the 5th will allow you to earn interest on the current month’s deposit as well.
What to do after PPF maturity
Once the 15 years lock-in period is over, an account holder can withdraw the money. The accumulated amount including the capital gain will not be taxed.
Another option is that an account holder can extend the tenure of the account. Institutions allow customers to extend indefinitely in a block of five years.
Another option is to extend the period without any contribution. After 15 years, banks allow customers to continue without contributing. This option is available by default. If you don't withdraw the money or make a formal request to extend the tenure for another five years, your institution will extend the time for five years without accepting any contribution.
PPF partial withdrawals
The government allows partial withdrawals from PPF accounts before the maturity. Partial withdrawals are allowed from the seventh year and the entire corpus can be withdrawn only after 15 years.
Investors can also get a loan on PPF account balance at the rate of 1 per cent. Investors are allowed to get a loan from the third year and till the sixth year after opening an account. The loan amount is, however, limited to 25 per cent of the balance in an account in the preceding year.
Suppose an individual is depositing Rs 1,50,000 yearly for 15 years. In the 15th year, the total deposited amount would be Rs 2,250,000. The maturity amount would be Rs 4,068,208. The account would earn Rs 1,818,208 interest (assuming an interest rate of 7.1% per annum).