Most of us in India, have in one way or the other, heard about public provident fund (PPF). At the onset, PPF is widely understood as a tax saving instrument. In PPF, the government steps in to help people create savings for themselves. This scheme aims to ensure that adequate funds are available at an old age. In order to encourage people to save, the government provides incentives like tax deductions, a higher rate of interest and complete security of their investments. It is a very attractive scheme for those who invest regularly.
Some of the key points to be understood while investing in PPF are listed below:
Minimum Investment is Rs.500/- per year while the maximum upper limit is Rs.150,000/- per year. One of the important differences between PPF and other schemes like NSC, is that every year you are required to make a minimum investment of Rs.500/- only, as compared to a lump sum amount of Rs.10,000/- for NSC..
Lock in period
There is a primary lock-in period of 15 years, to ensure that you receive money when you require it. The long lock-in period ensures that you have a sizeable amount of money on maturity. However, you can make partial withdrawals from the 7th year onwards.
Rate of interest
The current rate of interest is around 8.7%. Every year, the government revises this rate of interest.
Everybody is encouraged to open an account. Accounts can be opened in the names of minors also. You can make upto a maximum of 12 deposits per year.
Loans against your PPF account
In case you need money, but don’t want to withdraw it, then you can take a loan any time in or after the 3rd year till the 6th year.
Investment upto Rs.150,000/- is eligible for tax deduction under section 80 C. Also at the end of 15years, you will get the amount you deposited, plus all the interest earned is tax free.
How to invest in PPF
- You can open a PPF account in any post office or public sector bank or some private banks, as specified by the Government.
- Only one PPF account can be opened per person.
- There is no age limit for opening a PPF account.
- You can invest any amount ranging from Rs.500 to Rs.150,000/- in multiples of Rs.5/-.
Advantages of PPF
- Tax Exemption is one of the biggest benefits of PPF.
- There is no age limit for opening a PPF account. Also PPF accounts for minors can also be opened.
- Multiple deposits upto a maximum of 12 per year can be made.
- Around 50% of the deposits can be withdrawn after 7 years.
- The entire amount is tax free on maturity.
- You can avail of a loan any time after the 3rd year till the 6th In the 3rd year, you will be eligible for a loan upto 25% of the balance, at the end of the first year. If you are taking a loan in the 4th year, the amount will be 25% of the balance at the end of 2nd year and so on. From the 7th year onwards, you can withdraw up to 50% of the amount in your account, at the end of the 4th year or the financial year immediately prior to the withdrawal, whichever is lower.
Disadvantages of PPF
There is a lock in period of 15 years, with only partial withdrawals during this period. So it is very low on liquidity.
- The Interest rate is subject to change every year, depending on the Government’s decision.
- You can operate only one account per person.
- Premature closure may be allowed only in the case of a genuine emergency, at the end of 5 years.
In conclusion, we would like to state that PPF is not an investment option for those looking for liquidity or at short term returns. Instead, it is a steadily growing tax free investment for your retirement life.
Please read our earlier article on Fixed Deposits .
To know more please click here What every Indian should know before investing by Vinod Pottayil
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