Public Provident Fund has emerged as one of the most popular long-term savings and investment options for investors mainly due to its combination of safety, returns and tax savings.
Regular investments in this product can help investors create wealth and build a corpus for retirement.
PPF has a 15-year maturity. However, the facility can be extended for a block of 5 years. The extension request needs to be placed within one year of maturity.
The interest rate offered on PPF is announced each quarter. The current interest rate on PPF is 7.1% compounded annually, which is 1.5% to 2% higher than fixed deposit returns offered by public and private sector banks.
PPF is one of the safest investment products as it is backed/guaranteed by the Government of India. This risk-free product offers guaranteed risk-free returns. It falls under the EEE (exempt, exempt, exempt) status, which means that the amount invested, interest earned and maturity proceeds are all tax-free.
You can invest a minimum of Rs 500 and a maximum of Rs 1,50,000 in a financial year. The investment is allowed as a deduction from income under Section 80C.
You can take a loan on your PPF account between the 3rd and 5th year and make partial withdrawals after the 7th year, but for emergencies only.
In the last 5 years, the interest rate on the product has been in the range of 7.5%-9% per annum.
An Indian citizen can open a PPF account (joint account holding is not allowed, but you can appoint a nominee). If you become an NRI after opening a PPF account, you can continue investing in PPF.
The account can also be opened for a minor under guardianship. It is a good option to build a corpus for a male child to fund his higher education expenses. If you start at the age of six for a child, you can accumulate a good sum till 21, when he would go for higher studies.
For a girl child, Sukanya Samriddhi Yojana is a better option. The maximum age for entry in this scheme is 10 years. If by any chance you have missed the bus then you can open an account for the girl child under PPF. However, maturity proceeds will be available when she is 25, so it cannot fulfill educational requirements, but can be used to fund expenses for her marriage.
A PPF account can be opened at a post office or a bank. You can transfer your account from one branch to another or from one bank to another and from a post office to a bank and vice versa without any additional charge.
If a person started investing in PPF account from 1996 at the age of 35, in 2020 when he retired, he would have accumulated Rs 1.3 crore at an average interest rate of 9%.
So as soon as a person starts working and settles down, let’s say at the age of 30, he/she should open a PPF account and invest Rs 1.5 lakh for 30 years to build a solid corpus for retirement. Even in this low interest scenario, and assuming a conservative interest rate of 5% going forward, one could accumulate more than Rs 1 crore.
Source: Franklin Templeton Calculator
If you are in the 20% tax bracket, you also save Rs 30,000 in taxes by investing Rs 1.5 lakh in PPF account.
Over a 30-year period you save Rs 9 lakh in taxes. If this tax saving is also invested in a recurring deposit or a SIP in mutual funds, it could accumulate to become anywhere between Rs 15-20 lakh in 30 years.
To sum up, the EEE status makes PPF a very lucrative investment even in a low interest rate scenario as it guarantees risk free returns which are higher than normal term deposits with banks.
The power of compounding results in additional returns. So, go and open a PPF account if you don't have one already!