Since its launch in 1968, the Public Provident Fund (PPF) scheme has been a favourite savings avenue among investors due to its tax-free and guaranteed returns. Built on the Exempt, Exempt, Exempt (EEE) financial model, this scheme allows for tax exemption on investment, interest and maturity. For the general category of investors, this is the best performing small savings scheme, and ideal for long-term wealth creation.
Let us help you understand this financial instrument better.
Opening of PPF accounts
PPF accounts can be opened at any post office branches or nationalised, authorised banks. Many banks today even offer the facility to open PPF accounts online on submission of KYC documents and PAN details.
An account passbook is issued on opening the account, which is essential to claim tax deductions under Section 80C. You can only hold one PPF account in your name and opening of a joint account is not permissible except in the case of a minor.
While the minimum deposit required to keep a PPF account active is Rs. 500, the maximum deposit allowed in a financial year for claiming tax deductions and earning interest is Rs. 1.5 lakh. You can deposit beyond this limit, but the surplus amount will not earn interest.
You can pay by cash or cheque, either via lump sum or in 12 monthly installments. You can open the account with a deposit of Rs. 100.
Returns from PPF investment
Since it is a debt-oriented asset, your investment is safe. The rate of interest is set by the government annually based on the return on government securities. Currently, the rate of interest stands at 8% per annum.
PPF and tax benefits
While the principal amount qualifies for tax exemption under Section 80C, interest earned is tax free under Section 10. Although it is a 15-year investment, partial withdrawals are allowed from the seventh financial year following the opening of the account.
Loans can be taken from the third financial year onwards. The interest rate on a loan against PPF is usually 2% over the stipulated PPF interest rate.
Additional Reading: Avail A Loan On Your PPF
- Although the maturity period of a PPF investment is 15 years, it can be extended for another five years within one year of maturity
- The accumulated corpus may not always be able to beat inflation
- With a lock-in period of 15 years, the entire amount invested in the PPF account cannot be withdrawn prematurely
- NRIs are not allowed to open a PPF account
If you are someone with a low risk appetite, or someone who doesn’t favour volatile asset classes, opening a PPF account could be the right investment move for you.