Introduction of Public Provident Fund (PPF Account)
You must be aware of the term PPF Account which stands for Public Provident Fund. When you join a new job or start earning, almost everyone suggests you to invest in PPF to save tax. But what is PPF and is it really a good investment option? In this article, we will tell you everything about PPF.
The full form of PPF is ‘Public Profit Fund’ and it is a long term savings scheme that was launched in 1968 by the National Savings Institute under the Ministry of Finance.
Main motive behind starting this scheme was to encourage people to save and invest. Many Indians regularly invest in this scheme to avail of deductions of up to Rs. 1.5 lakh under section 80C. Now let’s discuss the features of this scheme. First comes the Risk-Return equation.
We all invest to earn returns, so now let’s understand how much return will you after investing in it and what are the risk factors associated with it.
Interest on Public Provident Fund (PPF account)
The government decides the interest rate of the PPF on a quarterly basis. Way back when the scheme was launched the interest rate received on it was only 4.4%. However, the interest rates have gone through many fluctuations since then.
In fact, in 1999-2000, the interest rate touched 12% but later dropped again. Talking about January 2020, the interest rate is now pegged at 7.9%, and the interest on your investment is credited to your account on March 31st every year.
Since it is controlled by the government, it is considered to be very low risk and is one of the safest investment options. In features, now let’s talk about the Investment limit.
Minimum and maximum investment in Public Provident Fund (PPF Account)
You can invest from Rs 500 to Rs 1.5 lakh every year in PPF scheme. One important thing to keep in mind is that it is mandatory to invest in PPF every year for 15 years If you fail to deposit the minimum amount of Rs. 500 in any year, then your account will become inactive and to reactivate it you will have to pay a penalty of Rs. 500. So now let’s talk about a very important thing.
What are ‘Lock-in’ period for PPF
The lock-in period for this scheme is 15 years, which means that you can not withdraw your money before the term ends. Among all other tax saving options, this one has the longest lock-in period. One benefit of 15 years lock-in period is that you earn more interest by investing for a longer period.
Considering uncertainties and important needs in life, the scheme offers an option of partial withdrawal. For selected reasons like higher education of your children or medical emergencies, you can withdraw after the 7th year onwards. Now it’s time to discuss a very important point – Tax benefits. Besides NPS and Sukanya Samriddhi Yojana, PPF is the only product that qualifies for EEE.
Tax Benefits of PPF Account in Income Tax
EEE means exempt-exempt-exempt, which is an amazing benefit. It means you get 3 types of exemptions on your investment. You get your first exemption when you invest in it. By investing up to Rs. 1.5 lakh in PPF every year, you can claim deductions under section 80C.
This reduces your taxable income and you can save tax up to Rs. 46,800. This means that even though you are investing Rs. 1.5 lakh, but because of the exemption of Rs. 46,800, your actual investment cost will be only Rs. 1.03 lakh.
The second exemption is received on the returns generated on the PPF account. As per rule, you don’t have to pay any taxon returns. Your first question would be why is that important? It’s because when compared to say Bank FDs, you have to pay tax on whatever interest you will receive or on what is getting accumulated. But it doesn’t happen that way in PPF. And finally, you don’t have to pay tax on the amount that you receive on maturity. so, that’s the third exemption.
Eligibility criteria for opening a PPF account
After learning about tax benefits, now let’s understand the eligibility criteria for opening a PPF account To open a PPF account, The first criteria is you must be an Indian citizen. You can open only one PPF account in your name but if you have a minor in your family, you can also open a PPF account on their behalf.
At the same time, NRIs and Hindu Undivided Families are not permitted to open PPF accounts. However, HUF is allowed to invest in one individual family member’s account. Opening a joint account in this scheme is not possible. Since we are discussing this scheme in detail, one should also know that the opening charge of a PPF account is Rs. 100. And you can start an investment with a minimum of Rs. 500.
Where to open the PPF account?
Now as eligibility criteria is clear, you must be thinking how and where can you open the PPF account? You can open a PPF account in banks or post offices. Initially, you could open PPF account only in nationalized banks but now private banks also provide this facility.
What are the Document required to open PPF account?
So now let’s talk about what documents are required to open a PPF account. Application form with your details. ID proof like – Aadhar Card, PAN Card, Passport Address proof with current address signature proof Now when you know pretty much everything about PPF, you should also understand “Is it the best tax saving investment option for you?”
Is PPF investment profitable ?
It’s true that PPF is a safe investment vehicle, which is a government-backed scheme, so the risk involved is almost nil. But if you want to use it to achieve your long term goals, then it won’t be a smart choice. The main reason behind this is the returns it gives you.
Let’s understand it with an example. Suppose you are investing in PPF for the higher education of your child. Now PPF is offering you 7.9% return and education cost is increasing by around 10% every year and becoming more expensive. If this trend continues, then the final corpus for higher education could be insufficient.
Not only this, but the lock-in period for PPF is 15 years, which is longer than all other tax saving options. Then what is the solution? You can invest in ELSS mutual funds. This is a mutual fund category wherein youreceive the same tax benefits. The lock-in for these schemes is 3 years which is way less compared to any other tax savings investments.
Talking about long-term returns, with over 5 years investment period, these funds have actually beaten returns of PPF. Higher returns mean higher compounding, which directly means a bigger investment corpus. But a word of caution. Since ELSS funds invest in the stock market, you will see lots of fluctuations in their returns.
It is possible that for 1 or 2 years you may not receive any returns or earn negative returns. But in the long term, ELSS mutual funds have given historically around 11% average annual return. So if you are investing in ELSS, then do not expect the same returns every year.
If you want to know how much tax you can save, and how much and where you should invest, then Read: Deductions Under Chapter VI A [2020-21]: Section 80C, 80D To 80U.
Also Read: Govt Reforms & Incentives for MSME Sector
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