Introduction
Public Provident Fund or PPF is one of the most in-demand government-sponsored, long-term saving schemes available in India; to aid the building up of one’s savings account along with offering the advantages of tax benefit.
It was incepted by the Government of India way back in 1968 and is a first choice of investors for a safe scheme coupled with excellent returns in interest as well as an additional facility to save income taxes.
PPF is a great investment scheme in this day and age of increasing demand by people to secure their financial future and plan for retirement, as it is a risk-free investment avenue.
The PPF has been largely attracted by the declaration of the fixed rate of interest by the government, which occurs quarterly.
That is an excellent investment for a risk-averse investor who is not willing to take any sort of risk in the equity market but wants some decent returns over a period.
Hence it comes with three-fold tax saving advantages and accordingly one of the most effective instruments used in Section 80C under Income Tax.
This article provides very basic insight into Public Provident Fund, which speaks about the features and importance along with related objectives as well as its many benefits.
It has gone into this very simple financial tool that makes every individual rich after a considerable time span to secure financial planning.
Overview of PPF
The Public Provident Fund is one of the safest popular government schemes on investments that carry an assured fixed return.
Launched in 1968 by the Government of India to provide the risk-free investment instrument to help citizen save money in the long-run for their retired life, fund education needs and other such funds.
The PPF account can be opened in any post office or in any bank. Interest earned in that account is announced by the government every quarter of the year.
The quarterly rate of interest remains the same for the whole calendar year; the investor will then be able to be sure what amount they may expect at any time of the year.
The PPF account is valid for a term of 15 years. On the expiry of each term, a PPF account can be further extended for 5 years.
During the initial 15-year term of the PPF, the investors have to make minimum annual deposits, and the amount in the PPF cannot exceed ₹1.5 lakh per year.
Besides the fine rate of interest, the PPF scheme benefits a lot due to tax deductions. When it comes to the Income Tax Act, Section 80C allows for deductions through deposits in bank accounts.
The received interest and, at the time of maturity, it is free of tax.
Features of PPF
The PPF scheme has certain special features that have been making it one of the favorite investment options for Indian investors. The features are as follows:
1. Eligibility
Any Indian citizen, even minors can open an account under the PPF but not NRIs, as it prohibits investment there.
A child is also eligible for PPF; however, till he/she reaches his/her major which is 18, one must get a signature of the guardian.
2. Investment Amount
This is flexible in the choice of contribution that is allowed in the PPF.
The least amount to be contributed towards this account every year is ₹500, and the highest annual contribution is ₹1.5 lakh.
A single amount or through installment, which might be monthly, quarterly, or annually, is allowed to contribute towards this scheme.
Furthermore, the mode of payment can be opted according to the financial condition of the investor.
3. Rate of Interest
The interest rate on PPF is determined by the Government of India every quarter, and it is generally higher than that of the traditional savings account.
The rate may change, and it is usually announced every quarter by the Ministry of Finance.
For instance, this year 2023, interest rate is calculated at 7.1 % per annum with annual compounding and calculates it based on the least balance between 5th last day of any month.
4. Lock-in Period
PPF has a lock-in period of 15 years and the money is not repaid before maturity except on fulfilled partial withdrawal conditions.
The account can be continued for another 5-year duration after reaching maturity based on the discretion of the account holder, with or without further contributions.
5. Tax Benefit
PPF provides a good tax benefit. An individual contributor has been opportunely matched with 80c, up to the maximum of Rs 1,50,000 per year.
The interest accrued on the balance amount of PPF account is not includible while computing income tax.
At the time of maturity, the total amount will be tax-free which will consist of contribution as well as interest.
6. Loan and Withdrawal Facility
PPF provides the facility of taking loans against the balance in the account.
An account holder can withdraw the loan against his balance in the PPF account after 3 years of investing.
The government provides the loans at a rate of interest, and the loan amount cannot exceed 25% of the balance available in the account at the end of the second year before the loan application.
Besides loans, partial withdrawal is also allowed after the 6th year in some circumstances from the PPF account.
Up to a maximum of 50% of the outstanding balance at the end of the 4th or immediately preceding year, It is possible to make a loan.
Significance of PPF
(PPF) will not only be a saving instrument but also will be a general vehicle for gaining wealth, tax saving, and retirement benefits.
It is a tool for disciplining the public into saving and an encouragement to think about the future financially.
Now, let’s discuss some reasons why PPF is important for Indian investors.
1. Risk-Free Investment Option
The PPF, sponsored by a Government of India scheme, is one of the safest investment plans momentarily available in India.
This is because one faces hardly any risks from the market and no fluctuating stock markets.
Thus, it is quite an attractive scheme for conservative investors who can get a fixed return without risking the principal amount.
2. Long-term financial planning
The 15-year tenor of PPF makes the investor think in the long run while planning finances.
It helps investors create a good corpus over the years, which is great for retirement planning or other financial goals such as children’s education or house buying.
3. Tax Benefits
The significant benefit of such investment also lies in the tax-saving aspect of this investment.
It has been provided that under section 80C of the Income Tax Act, the contribution to PPF shall be deducted, reducing the total taxable income of the assesses.
In addition, both the interest accruing on investment and the maturity proceeds are totally tax-free.
Thus, PPF offers threefold tax savings: tax savings at the time of contribution, tax-free interest, and lastly, tax-free maturity proceeds.
4. Savings Culture
PPF encourages saving. A minimum annual contribution of ₹500 enables an investor to contribute regularly towards a goal.
Saving regularly is very effective in the long term as a small amount can be saved, and invested on a regular basis thereby resulting in a sizeable amount with the compounding effect.
5. Liquidity and Accessibility
Although PPF is a long-term investment, it offers some liquidity in the form of loans after the 3rd year and full withdrawal after the 6th year.
This makes the scheme flexible and accessible during emergencies while encouraging long-term saving.
Objectives of PPF
The Public Provident Fund is best aligned with the idea of long term financial security retirement planning and generation of wealth.
Let us have a look on prime objectives PPF scheme in focus now:
1. Generation of wealth
The main purpose of PPF is to assist in the long run in building wealth.
It allows people to grow money with fixed interest rates, tax-exempt returns, and absolute stability that can help people achieve their financial objectives, whether it’s retirement or a home purchase.
2. Retirement Planning
This is an excellent tool for retirement planning. The 15-year lock-in period allows an individual to save his or her wealth over time, and hence it’s an excellent option to create a corpus for retirement.
The ability to extend the account in blocks of 5 years provides the investor with the option to keep saving for as long as he or she wants.
3. Tax Savings
The first objective of PPF is saving in the form of tax savings. Contribution to the PPF qualifies as a deduction under Section 80C of the Income Tax Act, and interest earned is totally tax-free.
Hence, it forms a popular investment product for saving tax through reducing the income and paying lesser tax.4. Building Corpus for Minors
PPF even permits opening an account for a minor also, and, thus it acts as an excellent savings avenue for parents wanting to save something for the educational or wedding fund of their little ones.
A corpus built through PPF ensures that funds will always be available in the future, which otherwise cannot be predicted or quantified.
Benefits of PPF
There are various advantages an investor gains on investing in the PPF plan. Among its various attractions and advantages, there are some prime benefits as described below:
1. Risk-Free Investment
As PPF is Government of India-guaranteed, it forms a risk-free investment opportunity. Unlike the fluctuating stock market and volatile mutual funds, PPF promises a fixed return without any market fluctuation.
2. Tax-Free Interest and Maturity Amount
The tax-free interest earned and maturity proceeds make PPF an extremely attractive tax-saving instrument.
The investment is assured to grow over time while saving tax.
3. Fixed Returns
The PPF provides fixed and attractive returns that the government sets.
The fixed interest rate makes it a stable source of investment for those seeking to have certainty about their returns on investment.
4. Flexibility in Contributions
It enables the pay of contributions in lump sum or periodic installments.
This flexibility regarding PPF is what makes an investment easy according to one’s comfort and financial powers.
5. Loan and Partial Withdrawal Facility
In this context, investing in mutual funds has the added benefit of mitigating tax on capital gains.
Thus, the facility of loan can be used during emergencies. Loan facility helps an investor in getting money at a low interest rate without having to liquidate the entire investment.
6. Wealth Protection
PPF protects the money of the investor. The moneys saved in the PPF account do not face any creditors or court cases, and it is a well-balanced place to build wealth over a long term.
Conclusion
PPF is one of the best landmarks of investment in India, due to its safety, tax benefits, and safety in saving money and building long-term wealth.
It encompasses government support, attractive interest rates, and tax-saving facilities, which make it ideal for conservative investors as well as for those looking forward to securing their financial future.
Its features, such as a 15-year lock-in period, loan and withdrawal facilities, and tax-free returns, encourage disciplined saving and ensure that investors amass a huge corpus for long-term financial goals.
With small, regular contributions, people can avail the compounding power to create a financial safety net for themselves and their families.
Whether you’re saving for retirement, education, or any other financial goal, the PPF scheme is a valuable tool in your investment strategy.
Its long-term focus, along with the security of government backing and tax benefits, makes it one of the most excellent investment avenues for Indians.
Using PPF is not a choice of saving; it is instead a process to give that assurance and confidence that the future will be secured through the financial route.
Frequently Asked Questions
1. What is PPF and how it works?
Public Provident Fund is a government of India-backed long-term saving scheme offers a saving cum stock option facility along with attractive benefits.
An individual can contribute a minimum amount of Rs. 500/- and a maximum sum of Rs. 1.5 lakhs annually in the Public Provident Fund (PPF) account and gives them an interest rate which is completely tax-free.
The time period of the PPF account is 15 years extendable in blocks of 5 years at a time. It compounds annually.
People need to know that Public Provident Fund is certainly qualifying under section 80C for the exemption provided by the tax.
2. How much will I get after 15 years in PPF?
Value received at PPF after 15 years solely depends on the amount depositor remits annually, and the interest rate on the prevalent basis (7.1% per annum) that is paid. It is compounded annually;
hence, it is a function of regular contributions and the total balance accumulated over the years.
Example: The amount, up to maximum ₹1.5 lakh annual investment, made at an interest rate of 7.1%,
for 15 years, brings around ₹41-45 lakhs (through contribution and accrual of interests year-wise)
3. What are the details of the PPF scheme?
Some advantages of the scheme PPF offered are as given below:
o Eligible Citizen: It has been available exclusively to Indian citizens – not NRI.
o Lowest Contribution: at ₹500, per annum only.
o Maximum Contribution: ₹1.5 lakh per annum.
o Interest Rate: Government sets it quarterly, currently 7.1%.
o Tenure: 15 years, extendable in blocks of 5 years.
o Tax Benefits: Contributions are tax-deductible under Section 80C and both interest earned as well as the maturity amount are tax-free.
o Partial Withdrawals: Allowed after 6th year
o Loan Facility: Available after 3rd year.
4. Can I withdraw 100% from PPF?
No, you cannot withdraw the entire amount from your PPF account prior to the expiration of the term of 15 years.
Withdrawal partially is possible after completion of 6th year but not more than 50% of the balance at the end of 4th year or preceding year, whichever lower.
You are allowed full withdrawal only after expiry of 15 years.
5. Can I close PPF after 5 years?
The complete balance in PPF can be withdrawn only after satisfactory completion of at least 15 years tenure for that PPF account.
However you are still permitted withdrawing partial balance or a loan on that balance just after 5 years.
For early withdrawal also, you can withdraw at the end of 6 years too, but all such withdrawals have to be carried out as per the norms of withdrawal allowed above.