The Public Provident Fund (PPF) is one of the most popular savings schemes with a limited risk-free investment tool. The PPF interest rate is now 7.10% per annum. While PPF is completely a debt instrument and most investors are unaware of its features. A PPF account offers a good combination of security, returns and tax benefits. Industry experts list seven features of this popular savings program.
1) PPF Mandate
A PPF account matures in 15 years and you can extend it in blocks of 5 years each. Gaurav Kapoor, director and co-founder of Fincorpit Consulting Private Limited, said that PPF also has a 15-year maturity period and you can also extend this term in blocks.
2) Cheap loans
The PPF account is not just an investment option, but can help account holders take out a personal loan in times of financial emergency. According to the PPF loan rules, an account holder can obtain a loan on a PPF account from the 3rd to the 6th year of opening the PPF account and the interest rate of the PPF loan is only 1%.
Gaurav Kapoor said that another feature offered by PPF is loan on PPF at cheap interest rate, you can take personal loan from account balance. This can be very convenient, especially when the loan is for a shorter term and the interest rate will also be very competitive.
3) Partial withdrawals allowed
A person is allowed to withdraw from their PPF account only when the PPF account is at least six years old. Amit Gupta, MD, SAG Infotech said that even though the account is six years old, only 50% of the total fund can be withdrawn. The balance amount remains in the PPF account. The partial withdrawal can be made from the sixth financial year following the opening of the PPF account.
4) Insured but not fixed interest rate
Since PPF returns are quite higher than other fixed investment schemes, you can easily earn returns that beat inflation over the long term. In addition, the interest rate is adjusted quarterly by the government, and in the current quarter, the PPF yield is 7.1%.
“If we assume that the current PPF interest rate of 7.1% remains constant over time, one can easily build up a large retirement fund of more than ₹1 crore when he retires. The PPF interest rate remains the same at 7.1% over time, and then a person can build up a large retirement fund of around ₹ 1 crore when he retired,” said Amit Gupta
5) Invest in PPF before the 5th of every month
You must deposit the PPF installments before the fifth of every month to earn more income. Currently, the next best time to deposit in PPF would be between April 1-5.
Interest on the PPF deposit is calculated monthly. However, interest is credited to the PPF account at the end of the Fiscal Year.
“The balance of the PPF account between the 1st and the 5th of the month is taken into account for the calculation of interest. Deposits made to the PPF account before the 5th of the month earn interest for the whole month. Suppose your PPF account balance was ₹2 Lakh on April 05, 2021,” explained Archit Gupta, Founder and CEO – Clear
If you deposit an additional amount ₹1.5 Lakh in your PPF account on April 06, 2021, interest accrues on the minimum account balance between April 5 and April 30, 2021, which would be ₹2,000,000. Investors lose interest on the additional deposit of ₹1.5 Lakh for April 2021, he added.
6) Tax advantages
The Public Provident Fund scheme is very popular among taxpayers. One of the important reasons for its popularity is the fact that the PPF falls under the category of tax-exempt-exempt-exempt status.
“PPF is eligible for the EEE tax regime. PPF deposits are tax deductible up to ₹1.5 Lakh per financial year under Section 80C of the IT Act. In addition, the interest generated by the investment and the amount at maturity of the PPF are tax exempt,” said Archit Gupta.
7) Premature closing of the PPF
A PPF account matures after 15 years from the year the account was opened. You can make early partial withdrawals or close the account prematurely – any time after five years from the end of the financial year in which the account was opened.
“Investors may prematurely close PPF accounts in specific situations such as treatment of life-threatening illnesses of the account holder/spouse/dependent children/parents after the completion of five years of opening the PPF account. In addition, PPF accounts may be closed prematurely for the account holder’s/dependent children’s higher education and change of residence to a foreign country,” Gupta explained.