PPF Account - What is it - How to invest ?

Enjoy tax benefits and experience the advantage of assured returns over the long-term with the Public Provident Fund (PPF) scheme

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Do you know which is the safest tax-free savings scheme in India?

The answer is not tough. It's the Public Provident Fund (PPF).

Introduced in 1968, the sole aim of this scheme was to offer investors a way to save money and grow their wealth in time with high returns. Another benefit of the PPF is related to income tax returns. Any balance in PPF is not subjected to wealth and income tax!

Why is PPF Considered To Be The Safest Saving Option?

Investment in the 21st century always carries market risks. No matter how good the company/mutual fund performs, any factor can have a massive impact on its returns. Let's take COVID-19 as the latest example. The stock market and mutual funds have taken a hard toll. In such turbulent times, people can get confused about where to park their funds and grow wealth.

This is where the Public Provident Fund (PPF) enters. Since this is a government-backed scheme, you can be rest assured that all your money invested (principal) along with interest earned (returns) will be guaranteed and safe. Moreover, it has provided higher returns than most investment options. Hence the common man in India invests in a PPF.

Want to open PPF account for minors ? Read more here

How Much Can I Invest In A PPF?

PPF is offered by the public sector (nationalized) banks. If you have a bank account in a nationalised bank, you can opt for the PPF service. If you don't have such an account, you will have to open one to apply for the PPF. Here are the necessary details for a new PPF account holder:

Minimum contribution - You can invest up to 500 rupees per year (annual)

Maximum contribution - You can invest up to 1.5 lakh rupees per year (annual)

This contribution limit applies to both minors and adults. You can make a maximum of 12 contributions annually. Also, you would be happy to know that investment in PPF up to Rs 1.5 lakh per year and interest earned on it are both tax-free. This means you won't have to pay a single penny as a tax on the investment.

What Is The Interest Rate Offered by PPF?

The Government of India declares the PPF interest rate for every quarter (3 months). This means every three months; you can keep a tab on the rate of returns. Let us also inform you that PPF returns are way higher than Fixed Deposit rates of major Banks in India.

As for the first quarter of the financial year 2020-2021, i.e. from April to June, the Government has fixed the PPF interest rate at 7.10%. This had dropped from the previous January to March quarter when the rate was set at 7.90%. Even with the drop, the amount being offered is better than most other tax saving schemes.

What is the Total Tenure of a PPF?

PPF is not just a regular tax saving investment. It's also a long term investment that grows with time. Many investors use this as a retirement fund. Some use it for their child's education fees. The total tenure for a PPF account is 15 years. You can invest for 15 long years. After the PPF expires, you can extend it for five years at a time. But please note that after the lock-in period of 15 years is completed, you cannot invest more money. You can only extend it and earn interest on your existing PPF balance.

Public Provident Fund (PPF) vs Voluntary Provident Fund (VPF) - Key points to know before investing

Can I Withdraw From My PPF During The Lock-in Period?

Yes. You can make partial withdrawals from the 7th year of your PPF account. But this depends from bank to bank. You must check if they allow withdrawals and from which year onwards. Do note that you can withdraw money once per year.

Can I Get A Loan Against My PPF?

Yes. There is a facility for investors to apply for a loan against their PPF account. But this facility is only for investors whose PPF account has completed a minimum of 2 years and a maximum of 6 years.

You can get up to 25% of your PPF account balance at the end of the 2nd year as the loan amount. For example: If your PPF account balance at the end of 2nd year is 80,000 rupees then you can get up to 20,000 rupees as the loan amount.

The interest rate for loans taken against the PPF account is 1% per annum more than the PPF interest rate. Yes, if the PPF interest rate is 7% and you have taken a loan against your PPF, then the interest rate applied will be 7+1 = 8%. The loan tenure stands at 36 months, i.e. three years only.

Tax Exemption Explained

One of the most popular long-term investments for those saving for retirement is the Public Provident Fund. It has high interest rates and a slew of tax perks, tax exemptions, and capital security. The interest and returns earned are not taxable under the Income Tax Act. In recent years, it has become one of the most tax-saving strategies.

PPFs pay a high interest rate and come with a slew of tax advantages. PPF offers a greater interest rate than most other fixed investment programmes of similar nature. PPF investments can be made in a flat payment or over a period of up to 12 instalments. For each financial year, the lowest investment is Rs 500 and the highest is Rs 1.5 lakh. The present interest rate is 7.1 percent per year, and the PPF account has a 15-year term.

Interest income is tax-free , which implies that interest generated on the fund is tax-free. When it comes to bank deposits, the interest generated is taxed. As a result, if you are in the highest tax rate, you are likely to pay a significant amount of tax. In reality, other instruments' post-tax returns will decline considerably, making the PPF a smart investment decision when compared to other choices in the same category.

Know everything about FORM H for the PPF Account - Read here