Public Provident Fund (PPF) De-Mystified

Public Provident Fund or PPF as it is more commonly called has been the staple investment avenue for thousands of Indians over the past two decades. Not only is it a good investment option, it also gives us tax benefits which makes it doubly attractive for an investor. We have covered the PPF as an investment option at a high level multiple times in this blog. Remember the articles covering Investments and Income tax like Best Tax Saving Options Available for Investment or Saving Income Tax through Investments?
The purpose of this article is to dive deeply into this great Investment Option. Lets get started!!!

What is PPF?

Public Provident Fund or PPF is a scheme that was introduced by the Government of India in the year 1980. Ever since that year, PPF has been a preferred choice for investment for the risk averse investor. Assured and Tax Free Returns make PPF even more attractive.

The PPF is just like the regular Provident Fund Account that salaried employees get throughout India. The only difference being, the PPF account can be opened by anyone and contributions can be made as per their preferences. The money saved in the PPF Account is backed by the Government of India and hence it is practically Risk Free. The money in the PPF Account earns interest just like the PF account which will be credited into our account by the Government.

What Makes PPF different from the Regular PF?

The Regular PF Account is available only for Salaried Employees in which case the contribution towards the PF Account will be made both by the Company where the person is working as well as the individual himself whereas, the PPF Account is available for anyone and everyone. It is available even for self-employed professionals or businessmen. The other difference is that, the contribution towards the account is made only by the investor and no one else.

Why Choose PPF?

There are multiple reasons as to why we must choose PPF as an investment option. Some are:
a. The Returns are Tax Free
b. The Money is backed by the Government of India. So, it is totally safe
c. The Investments made are exempt from Income Tax under Sec 80C (Up to 1 lakh per year)
d. One can open a PPF account in any bank or post office. Some banks even give us online options to open PPF Accounts through Internet Banking.
e. The Rate of Interest offered is very good. The current rate is 8.6% which is very good. The average rate of interest offered is around 8% which makes it above average returns for the risk averse investor.

If an investor contributes 1 lakh every year for 15 years, he will be left with around 31 lakhs at maturity (If the rate of interest goes at around the same 8.6% range). Your money has doubled at the end of 15 years which is amazing considering the fact that the money is totally safe and tax free.

Trivia:

If we consider the Tax Benefits that an investor will gain by investing in PPF along with the returns offered by PPF, the Returns work out to be more than 15% and would vary based on which tax slab the investor is in.

Some Key Points Reg. PPF Investment:

• PPF is a Long Term Investment Option (15 years Maturity)
• Maturity can be extended by an additional period of 5 years to make it a total of 20 years
• There is a minimum investment required every year (Rs. 500) to keep the account active
• There is an upper limit on the amount of money that can be invested every year (1 lakh) by an investor
• One Investor can have only one PPF Account. However, you can have one more in your spouse’s name without having to worry about tax liabilities even if the spouse is a home maker or has no income.
• If you have more the one PPF Account (In your own name), you need to close the others. When the other accounts are closed, there will be no Interest paid on the balance in the other accounts.
• Interest is earned on the PPF Account based on the minimum balance in the account between the 5th and the 30th of the Calendar month. So, if you contribute 10,000 towards your account on the 4th of this month, you will earn interest on it that month as well but if you invest on 6th, the 10,000 will start earning interest only starting next month.
• The interest is credited into our accounts annually (Once every year)
• Withdrawal is allowed once a year after the 6th year only and that too is only a % of your total balance. Full withdrawal is allowed only after the 15th year.
• PPF Accounts can be held or owned by only one individual. This is not like a bank account which can be jointly owned by two or more people
• The Balance in your PPF Account CANNOT be used as Collateral for loans that you may take
• Nominees can claim the balance in the PPF Account along with the interest accrued on the death of the account holder. The account has to be closed when the account holder dies.
• The PPF Account cannot be transferred from one person to another. Even in case of death of the account holder his/her nominee/legal heir cannot continue the account. They will be forced to close it.
• Loans are available against your PPF Money but the rate of interest has been hiked recently by the Government to discourage investors from dipping into their savings. The Government decides the Loan Rate every year just like the interest rate it pays to us.

PPF and Inheritance

We covered the concept of WILL and Legal Succession in one of our older post titled Have You Written Your WILL?. So, the question that arises now is what happens to the money in the PPF Account if the account holder died with no Nomination or WILL?

If the subscriber dies and there is no nomination at the time of death, the balance in the account, if it is up to one lakh, will be paid by the Accounts Office to the legal heirs of the deceased on receipt of application in Form G supported with necessary documents without the production of succession certificate. If the balance is more than one lakh, the production of Succession certificate will be necessary.
Verdict

In a Nutshell, the PPF account is a great investment option for anyone residing in India. If we consider the Tax Benefits that we may get out of the investments into the overall returns, the number stands at an astounding 15% or more which makes it one of the best debt investment options available in India. Contributing a good amount into our PPF Account every year can help us build a good Nest Egg for retirement.

So, if you do not have a PPF Account now and are reading this article, Please go ahead and open one for yourself and make investing in the PPF Account a disciplined activity every month or year. You will not regret the decision at all…
Happy Investing!!!