PPF- Public Provident Fund: Is it a Best Tax Saving Investment?
What is PPF- Public Provident Fund (PPF) is Long term saving scheme which is launched in 1968 by National Saving Institute of Finance Ministry of India. As name suggest -“Public” means it is for general public and “Provident” means Making arrangements for future needs by saving money. So it is open for all to plan for their future monetary Goals. Through this scheme GOI trying to encourage people to save and invest systematically for Long Term.
PPF Eligibility- Any Individual resident can open a PPF account. One individual can open only one account. You can open Minor account too under parent operation which has maximum deposit limit of 1.5 Lakh till the Minor’s age of 18. NRIs cannot open this account, if an individual has opened PPF account and after that he/she get the status of NRI, the account can be operated till its maturity after that it automatically get deactivated. HUFs, Trusts and Joint accounts are also NOT allowed. So if you are an Individual Indian citizen you can open PPF account.
How to open PPF account- There are 2 ways to open the PPF account. First is offline by visiting any authorised Post Office branch or any Public or Private bank. It is recommended that wherever you have your bank account you should open PPF account in that bank as it will little bit shorten the process. Other (and also recommended) way is online, if you have a bank account with internet banking, there is an option to open PPF account instantly. This becomes simple as bank already has done your KYC, you just need to fill details with required documents and minimum amount.
Minimum and Maximum Investment- When you open the PPF account there are rules for Minimum and Maximum Investment annually. You can open your account by depositing Rs. 500 in it. The minimum amount in one financial year that you have to invest is Rs. 500 and maximum amount you can invest in one financial year is Rs. 1.5 Lakh. If you deposit more than Rs. 1.5 Lakh in one year the excess amount will not carry any interest, so no point to invest more than Rs. 1.5 Lakh. You can deposit amount in minimum 1 installment and maximum 12 installments in one financial year.
Maturity and Lock-In period in PPF- PPF is considered as an investment for Long Term so it carries the longest Lock-In period in all financial instruments. The Lock-In period in PPF is 15 complete financial years. After completion of Lock-In period, it gets mature and you can withdraw your whole invested money (Principal +Interest). You can extend tenure in every 5 years for indefinite times. For example, you have opened PPF account when you of 25 years so it get mature when you will be 40 years and when you become 40 years, you can extend it for 5 years till you will be 45 years. When you become 45 years you can again extend it for 5 years and so on. There is no upper limit on this extension you can use this 5 years extension indefinitely.
Returns – The current interest rate of PPF is 7.1 % per annum. It is compounded monthly, every month your interest is credited to your main balance. The interest rate for PPF is not fixed; it is decided by Central Government every quarter. This is the lowest interest rate since inception partially due to economic slowdown because of pandemic. There are full chances that Interest rates will increase as economy recovers. Historic Interest rates for PPF are between 7% – 9%. It was highest in 1999-00 of 12% and lowest is current rate of 7.1%.
Tax benefits- The most attractive part of PPF scheme is its Tax Benefits. It falls under tax category of EEE – Exempt, Exempt and Exempt. It has all 3 exemptions-
1st Exemption- You can get the Tax rebate upto Rs. 1.5 Lakh under Section 80C. You can reduce your Taxable income straight by Rs. 1.5 Lakh if you invest in PPF.
2nd Exemption- You don’t have to pay any Tax on Interest accrued anytime.
3rd Exemption- You don’t have to pay any Tax on your maturity amount.
This is the only Investment instrument which has Zero Tax liability any time, the biggest benefit of this scheme.
Legal Benefits– Since it is a Government backed scheme so it has ZERO Risk involved. Moreover, it has Legal Immunity, it means if you have any running court case, court can order to seal or attach all your properties like your Home, Cars, Jewelries, Bank balance, Shares, Mutual funds, FDs etc. but court cannot attach your PPF balance because PPF has complete Legal Immunity. This is again a unique feature of PPF in all financial instruments.
Premature withdrawal- PPF has Lock-In period of 15 years, but there are cases when you can withdraw partial amount before maturity. There are 2 cases for premature withdrawal- First- from 3rd year to 6th year, you can take loan of same amount which is in your PPF account with Interest rate of current PPF interest rate plus 2%. Second- from 7th year to 15th year, you can withdraw 50% of balance in your PPF account. But there should be some valid reasons like Marriage/Education of Children, Critical illness in family or your skill development etc. Without any valid reason you will be NOT allowed for premature withdrawals.
Dormancy cases and reactivating of account- There is a provision to deposit minimum Rs. 500 every year. If you are not able to deposit Rs. 500 in one whole year, you account goes dormant. You can reactivate your PPF account by depositing the minimum amount i.e. Rs. 500 for every year for which account has been gone for dormancy plus Rs. 50 per year penalty. This amount of Rs. 500 for every year will be considered in your investment while Rs 50 of penalty will not be considered. For example- if you have not deposited any amount for 3 years, then on 4th year to reactivate your account you have give Rs. 1500 plus Rs. 150 penalty. Rs. 1500 will be considered for your investment while Rs. 150 will not.
Premature closure- The premature closure of PPF account is only possible in 2 conditions- First condition, your account must have completed 5 years and Second condition, there must be only 2 reasons when you can close PPF account. First- serious illness for any immediate family member and other is if you are going for higher education. Other than these you cannot close PPF account. If you premature close your PPF account you have to pay 1% interest rate penalty, for example whatsoever your interest accrued you will get 1% less. If you are getting average of 8% interest rate in premature closure you will get 7%.
Pro Tips for increasing your returns-
First Pro Tip- Suppose you have decided to deposit MONTHLY a specific amount in your PPF account. The interest calculated in PPF account from date 1st to 5th of every month, you will NOT fetch any interest if you deposit any amount from 6th to last date of that month. It means if you are depositing your monthly installment on 6th of every month. Due to this you are losing interest of 25 days for every new monthly installment. It seems it is a small amount but in long term this amount can reach to some lakhs depending on your investments. So you must deposit your monthly installment from 1st to 4th of every month.
Second Pro Tip- The Lock-In period is of 15 complete financial years hence the first year is not considered for Lock-In period. Suppose you have opened your account in July, 2020. The period from July 2020 to March 2021 will not be considered in your Lock-In although you will get the full interest on this period. Your First year of Lock-In starts from 1st April 2021 and 15 years will complete on 31st march 2036. So if want to complete your Lock-In period soon you should open PPF account on year ending around 25th March.
Is PPF a Best Tax Saving Investment- PPF scheme is no doubt a best Tax saving instrument due to its feature of EEE. Although the rate of return seems to be at lower side but it is far better than FDs. PPF has even beaten the Tax mutual funds in long term due to its feature of complete Tax exemptions.
Should you invest in PPF- PPF scheme is designed for Long term wealth creation and for Tax planning with full safety and security. You should invest in PPF if you fall in following 3 points:
- If you are less financially disciplined and have tendency to do expenses in luxuries/wants, due to its big Lock-in period of 15 years you have to follow discipline.
- If fall under higher Tax bracket like 30%, so that you save your Taxes.
- If you don’t want to invest in volatile instruments like Mutual funds and share markets but want safe and secure investments with good returns.
If you think these 3 points matches your financial planning you should invest in PPF.
Final Words- The conclusion is whether you invest in PPF or not, you have to invest with discipline. Ideally it should start from your very first salary. Only discipline investment creates you a big Corpus in Long term. So start investing today with discipline, if you have not started.