Public Provident Fund (PPF) is a tax-free, long-term investment scheme offered by the Government of India. It is a must have in everyone’s portfolio – as it completely safe, lock-in of 15 years making it a long-term investment that brings the benefits of compounding, typically has good interest rates (comparable to fixed deposits) and absolutely tax-free. Even those who prefer high risk-high reward investments can have PPF as their safety net.
Key points about PPF:
- Only one PPF account per individual is allowed. PPF cannot be joint account.
- PPF account can be opened only by Indian Residents. Minors can also have a PPF account operated by their parents till they reach the age of 18.
- Minimum deposit ₹ 500/- & Maximum deposit ₹ 1,50,000/- in a financial year.
- Provides guaranteed returns – interest rates (now @7.1%), compounded annually. Note that the interest rate changes quarterly.
- Interest is calculated on a monthly basis on the lowest balance between the 5th and the last day of the month.
- Interest earned is completely tax-free under Section 10 of Income Tax Act.
- Maturity period – 15 years.
- It is actually locked-in for 15 years, though loan facility is available from 3rd to 6th year and partial withdrawal permitted after 7 years.
- After 15 years, account can be extended for a block of 5 years (any number of times) with further deposits.
- After maturity, account can be retained indefinitely without further deposit with the prevailing rate of interest. (Unfortunately, the Post office personnel don’t seem to know about it – and as I could not extend it by going physically to post office due to Covid times, I was forced to close the account! Hence sharing the official link. Now I have opened it again in the next financial year using online banking – as you can have only ONE PPF at any point in time and not necessarily ONCE in your lifetime!)
The following graph demonstrates the “Power of compounding” of PPF:
Free Excel sheet you can download to check out!
If you invest in PPF for your new born child and on maturity: Option 1 – you want to withdraw – the total investment of ₹22.5 Lakhs would have grown to ₹40 Lakhs – which can fund your child’s education; Option 2 – the kid chooses to continue the investment till its retirement age of 60 – the total investment of ₹90 Lakhs over 60 years would have grown to a whooping amount of ₹14 crores!
Though I would like to leave it at that exhilarating note, due to inflation (if we assume 5% annually) the value of ₹14 crores after 60 years will be ₹75 Lakhs (lookup on Net present value if you want to figure out how this value is achieved). If you are retiring today, a nest egg of ₹1.3 Cr is considered a good amount for retirement. Taking that into consideration, half of the retirement needs can be met just by PPF investment over 60 years. Also remember that with the income growing steadily, saving 1.5 lakhs after 10 years may be much easier than doing it now!
If you have a girl child, less than 10 years old, you should first explore “Sukanya Samriddhi Account” which offers higher interest rates than PPF (now it is 8.2%) and has lock-in of 21 years and income non-taxable. The total investment of ₹22.5 Lakhs in 15 years would have grown to nearly ₹45 Lakhs (compared to ₹40 Lakhs in the case of PPF). It can be in addition or instead of PPF – depending on how much you can invest.
PPF can also be used as a means to save income tax. Section 80C of Income Tax Act provides deductions on investments up to ₹ 1.5 lakh per year from your taxable income. Note that, 80C is not applicable in the new tax regime. PPF benefits from the triple tax exemption, called as the exempt-exempt-exempt (EEE) – as tax breaks are provided at the time of investment, accrual, and withdrawal.
My recommendations regarding PPF are:
- Open a PPF account (if not already done so) – and it can be done via post office or banks (using online banking facility itself).
- Try to invest the maximum allowed amount every year and do it before the 5th of the month.
- Ideal situation is if you can invest ₹ 1,50,000/- before Apr 5th of every year. Make it your first investment of the financial year.
- Avoid taking loans or withdrawing and let it grow.
- After 15 years, keep extending till you reach your retirement age.
- Open PPF accounts for your minor children. A PPF account opened before the age of 2, can help the kid’s education need at the age of 17.
It is interesting to note that “The amount in the PPF account is not subject to attachment under any order or decree of a court of law”.
#PPF #PublicProvidentFund #PowerOfCompounding #EEE #RiskFreeInvestment
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Post Office Savings Schemes – ideal for the completely
Post Office Savings Schemes – ideal for the completely risk-averse investors