Public Provident Fund – A tax saving option in times of equity market volatility
For years, Public Provident Fund (PPF) has been a popular investment tool for millions of Indians who want a safe, government backed product. PPF is a part of the Small Savings Schemes that are not only backed by the government but also provide assured returns that make them more appealing to investors.
Amid the increased interest in stocks, mutual funds and crypto, most young investors have steered away from instruments under the Small Savings Schemes. With the many advantages of investing in PPF, investors can definitely consider especially given the recent volatility in equity markets.
Before we delve in to the reasons why investors must consider the instrument, let’s look at the features of PPF –
PPF has a tenure of 15 years, after which it can be extended in blocks of 5 years.
You can start investing in PPF, with a minimum of Rs500 and a maximum of Rs1.5 Lakh. Investments can be made in installments or in a lump sum. Remember, you must invest at least Rs500 every year to keep the account active.
Resident Indians can invest in PPF whereas HUFs and NRIs cannot. However an existing PPF investment made by a resident who becomes an NRI will remain operational for the 15-year tenure, after which it cannot be renewed. A minor can also have a PPF account but parents must operate it.
Coming to the part that matters the most to investors. Investments in PPF earn 7.1% in interest per annum, compounded annually and payable on 31 March every year. While the government revises these rates quarterly, at the moment the returns from PPF are higher than that from other Small Savings Schemes like the National Savings Certificate and Post Office deposits. The interest of 7.1% is calculated on the lowest balance between the close of the fifth day and the last day of every month. That is why it is advisable to invest between 1st April and 5th April every year and if you have chosen to invest in monthly installments, invest before the 5th of every month.
So what makes PPF a preferred mode of investment for so many Indians?
In addition to being a product that has government guarantee, the fact that PPF is not linked to the equity market, makes it a safe haven for conservative investors.
Another advantage is that you can avail loans against your PPF investment. However the loan can be taken only between the beginning of the 3rd year and end of 6th year of your investment. The interest payable on such loans is 1% per annum. One must remember that when a loan is taken from the PPF account, there will be no interest income from the PPF investment, until the loan is repaid.
Under Section 80C of the Income Tax Act, your entire contribution in PPF will be exempt from tax up to ₹1.5 lakh every year. In addition, the interest accrued every year and the maturity amount at the end of 15 years both are exempt from tax. Therefore you get tax exemption at the time of investment, on interest accrual and on maturity, making PPF an EEE (Exempt, Exempt, Exempt) investment.
Another great plus point that not many investors are aware of is that the PPF account is not subject to attachment in any court order or legal proceedings in respect of an outstanding debt/liability. Which means, in case of the demise of a person who has any outstanding debt, the PPF investment cannot be attached to settle dues. “The PPF account balance goes directly to the surviving family members”, explains Nishith Baldevdas, Registered Investment Advisor and founder of Shree Financial.
So while guaranteed returns and tax benefits are good enough reasons to invest in PPF, the biggest disadvantage of investing in PPF is the 15-year lock-in period. However, in specified situations like life-threatening health conditions or funding of higher education, partial withdrawal or premature closure can be made after completion of 5 years from the time of first investment.
“Considering the advantages and disadvantages of investing in PPF, this investment option under the Small Savings Scheme is recommended for all business owners and professionals who do not have any committed savings for long term goals and are also not covered under investment plans like the Employee Provident Fund which helps salaried people invest for the long term. Conservative, risk-averse investors who are preparing for long term goals, will also benefit from PPF since it is a low-risk investment with guaranteed benefits,” says Baldevdas.
If you have decided to invest in PPF, lets understand how the investment can be made. You can either visit a post office or bank and start investing or can initiate the entire process online through the portal of the chosen bank.
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