Invest in PPF - 8 reasons you should know about

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Public Provident Fund is a well-known secure savings scheme backed by the Government of India. PPF was introduced in 1968 by the Ministry of Finance (Government of India).

An individual is eligible to open an account for himself/ herself and on a behalf of a minor. He/ she can deposit up to Rs 1.5 lakh for both the PPF accounts in a single financial year. In each financial year, one can deposit a minimum of Rs 500 and a maximum of Rs 1.5 lakh.

A lock-in period of 15 years may permit you a partial withdrawal and premature withdrawal. In addition, the benefits of a loan can help you in times of trouble. Public Provident Fund account classified under EEE (Exempt-Exempt-Exempt), makes PPF a lucrative option for long-term investors. 

Also Read: Sukanya Samriddhi Yojana (SSY)-Eligibility, Interest & Other Benefits

Here are the eight points discussing why should you invest in PPF:

1. Security - A Risk-free Investment

Public Provident Fund is a Government assured secure savings scheme. Losing money in PPF is almost impossible. You can open your PPF account in financial institutions like Post Office, Banks, etc. No need to think about either a Government bank or a Private bank. Your money is enough-secured in every institution.

Let's understand a scenario, suppose you have your PPF account in a Bank. You need not worry if, in case of bankruptcy, the Bank fails to pay your money. The Government is obliged or gives you the guarantee to repay your invested capital along with earned interests. 

Public Provident Fund is known as the most secured savings scheme in India. PPF scheme guarantees you that your capital is only yours. No one has control over it or even by Court. These make PPF the best saving secure instrument in India.

Recommended Article: PPF vs ELSS: Detailed Comparison & Which is Better

2. Coverage - Saving Scheme for All

Any residents of India of any age can open a Public Provident Fund account. PPF allows a minimum deposit of Rs.500 and a maximum of Rs. 1.5 lakh for a financial year. However, the upper and lower deposit limits may change in the future as the Government revises the scheme every few years.

It is better for monthly depositors to deposit from the 5th day of the month to the last day of each month getting better returns. Deposits before the 6th month of the year are better to get an optimum return. As per Public Provident Fund rules, the interest calculates within this period on the minimum balance of the account.

3. Interest Rate - Better than Bank Deposits

PPF is known for its attractive interest rate. The scheme is always giving better interest than Bank deposits. Returns for most bank FDs are fully taxable, whereas the return from PPF is completely tax-free. However, The interest rate of this scheme is reviewed every quarterly by the Government of India. At present, the PPF interest rate is fluctuating due to various economic reasons.

As of October 2020, the current rate of interest of PPF is 7.1 percent with annual compounding. The yearly accumulated interest gets paid on 31st March of each year.

4. Flexibility of Tenure

PPF is a long-term savings scheme that comes with a 15 years lock-in period. However, you can extend the tenure by five years of interval.

In order to extend the tenure, you need to place a request for the tenure extension one month prior to the maturity date. Once you applied for the extension, your Public Provident Fund account will remain active for the next 5 years. You can continue this process of how long you want to continue the PPF contribution. Tenure extension may be two types:

Tenure Extension With Contributions

With this kind of extension, you are allowed to continue the contributions to the Public Provident Fund account further for the next five years.

Tenure Extension Without Contributions

In this case, further contributions will not be allowed. Only the applicable interest paid for the next five years. You need not apply or make a request for this kind of tenure extension. It will be automatically applied unless you close your PPF account. 

Also, read: PPF withdrawal, loan, pre-mature account closure rules

5. Partial withdrawal

Sometimes partial withdrawal makes sense when we need some money. PPF permits partial withdrawal with some conditions. Premature withdrawal is allowed after completing five years from the opening date of the account. Here some key points regarding the partial withdrawal: 

• Withdraw a maximum of 50% of your savings in the last four financial years.
• Only one-time partial withdrawal is allowed under this scheme.
• You have to submit the application form along with the PPF passbook. 
• Withdrawals before or after maturity will be tax-free.

6. Plenty of Tax Benefits

Many like me would place more importance on the nature of tax-free income and want to invest in PPF. Public Provident Fund account categorized under EEE (Exempt-Exempt-Exempt). With this exemption, the entire investment on this account is made tax-free. 

• Contributions under PPF are eligible for tax exemption under 80C with an overall ceiling of Rs 1.5 lakh. For example, if you invest Rs.80,000 in a financial year, you can get a tax deduction of up to Rs 80,000.
• The interest from PPF is tax-free. However, during tax-return, it's mandatory to include 80C to get the tax benefit.
• Tax on withdrawal on maturity (Long Term Capital Gain Tax) is also exempted.
• Tax will not be applicable to partial withdrawals.

7. Loan facility

You can apply for a loan against your PPF account. But the loan should be between the completion of the 3rd years and 6th years prior to maturity. Here are some rules you should know about loan against a PPF account:

• Depending on the amount you invested in the previous two years, you can take a loan maximum of 25%.
• You must repay the loan within 36 months from the date of borrowing. If you do not pay back the amount in time, a 6% additional loan interest will be applicable. So, always try to repay in time.
• The loan interest is always 2% higher than the current rate of interest in PPF.
• A PPF account holder cannot take a new loan until the old loan gets repaid.
• Even if you repay, you can take a loan once a year.

8. PPF - A Wealth Creation Tool

Believe it or not, PPF can make you crorepati. If you invest in PPF with discipline, I am sure, you will be able to create pretty good wealth for yourself. The scheme we are talking about has the potential to grow your money significantly. All you need to start your investment as early as possible. 

Let's see some examples of returns in PPF: