The advantages of tax savings and tax-exempt returns make PPF an excellent option for achieving one’s long-term financial objectives.
Public Provident Fund (PPF) is regarded as one of the most favored investment options, especially for individuals seeking long-term and secure investment avenues. The advantages of tax savings and tax-exempt returns make PPF an excellent option for achieving one’s long-term financial objectives. It is, however, important to understand several key aspects of the PPF scheme prior to making an investment.
Features
The PPF scheme provides tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Additionally, the returns generated from this investment are also exempt from taxation. It is important to note that there is a mandatory lock-in period of 15 years, during which withdrawals are not permitted. However, partial withdrawals is allowed after the completion of six years under exceptional circumstances, such as for meeting higher education expenses or in the event of a medical emergency.
An individual is permitted to maintain only one PPF account, and eligibility for the scheme is restricted to Indian citizens. In the context of PPF, the initial capital, accrued interest, and the total returns upon maturity are all free from tax liabilities. The investment can commence with a minimum annual contribution of Rs 500, while the maximum annual investment is limited to Rs 1.5 lakh.
“Failure to meet the minimum investment requirement in a given year may result in the account becoming inactive. The interest rate applicable to PPF is determined at the beginning of each quarter and may be revised periodically. Currently, PPF offers an interest rate of 7.1% per annum, which is compounded annually,” informs Adhil Shetty, CEO, BankBazaar.com.
Interest Rates
For individuals in the 30% tax bracket, investing in PPF may yield higher returns than a fixed deposit at a bank. Currently, most banks provide interest rates between 6% and 8%. However, the interest earned on these deposits is subject to taxation according to the applicable slab rate.
In contrast, the returns from a PPF account are completely tax-exempt. Therefore, if the prevailing interest rate is 7.1%, this translates to an effective advantage of 2.22% to 2.55% per annum over the post-tax returns from FDs.
It is important to note that the maximum investment allowed in a PPF account is Rs 1.5 lakh per annum, with a minimum contribution requirement of Rs 500 per year.
Investment Strategy for PPF Determining Your Investment Amount
Your contributions to a PPF account should align with your financial objectives. A clear understanding of your goals will help you ascertain the appropriate amount to save in your PPF. For instance, if you aim to accumulate Rs 25 lakh in 15 years for your children’s education, saving Rs 1 lakh annually at the current interest rate of 7.1% would result in a maturity amount of Rs 27,12,139 after 15 years.
Similarly, if you need around Rs 40 lakh after 15 years for the downpayment of your first home, you need to invest Rs 1.5 lakh annually in your PPF account.
Based on your financial needs, you can adjust your PPF contributions accordingly. The interest rate for the PPF scheme is set by the Central Government and is reviewed quarterly. As individuals age, their risk tolerance generally decreases. PPF serves as an excellent low-risk investment option to incorporate into your portfolio, although it should not be your sole investment
