Everyone has plans after retirement. And to live a wealthy and healthy life after retirement needs some savings. One of the most popular and safest ways to save for retirement and build a corpus is the Public Provident Fund or PPF.
Public Provident Fund or PPF is a savings-cum-tax saving investment introduced by the National Saving Institute of the Ministry of Finance in 1968. The objective behind the scheme is to allow savings for retirement through an investment platform with assured returns along with income tax benefits. This scheme is only for Indian residents and barred for non- Indian residents since 2018.
The PPF works on an important aspect called compounding.
When we invest in an investment option, it gives an interest rate or returns. This interest is added to the initial investment (principal). The interest can be added on a quarterly or annual basis. An investment is said to give compound interest when the increased amount fetches interests based on the growth that took place in the previous period. That means that the accumulated interest is further added to the principal, and the interest is calculated on the principal amount along with the accumulated interest.
The advantage of compounding is that your money gets multiplied at a faster rate than an option where the interest is paid out.
Features of PPF:
- Investment Period: The investment period for PPF is for 15 years. As it comes with a long tenure of 15 years, your investments get ample time to benefit from the power of compounding.
- Investment Limit: You should at least a minimum of Rs.500 to Rs.1,50,000 every year. You can invest at one go or invest in a staggered manner throughout the year. The investment limit is Rs.1.5 lakh as it is the highest contribution that can be made by an individual to save tax under section 80C of the Indian Income Tax. PPF is one of the investment options that help you to save tax under Section 80C. You can invest more than Rs.1.5 lakh in a year but it won’t fetch any returns or give extra tax benefits.
- Interest: PPF holders get an assured interest rate. This rate of interest is fixed every quarter and is based on the rate of returns given by the benchmark government bond.
- Loan Facility: PPF scheme holder has the advantage of taking a loan on their account. The loan facility is available from 3rd financial year to the 6th financial year.
- Nomination Facility: You can nominate your dear or near ones so that they can benefit from PPF in your absence during the crisis.
- Account Transfer: You can transfer your PPF account from one branch to another or another bank on the request. This service has no charges.
Why invest in Public Provident Fund?
- Assured Returns:
Every PPF holder gets the benefit of assured returns that are fixed quarterly based on the returns on government bonds. Hence, you don’t have to worry about equity market fluctuations. Hence, your money will keep on increasing every year.
Since PPF is backed by the government and is completely safe.
- Flexible amount to deposit:
You don’t have to deposit a huge amount in your account. You have to deposit a minimum of Rs.500 to a maximum of Rs.1.50 lakh annually. Hence, you can choose how much money you want to invest in a particular year.
- Emergency Purposes:
PPF can help during emergencies as well. After five years, you can withdraw the money before maturity for education loan or medical treatment. However, premature closing will attract a penalty of 1%.
- Tax saving investment:
PPF account is a tax saving investment. According to Section 80C of the Income Tax Act, 1961 PPF contributions of up to Rs.1.5 lakh made every year is eligible for tax deductions.
Points to remember before investing in PPF:
● PPF does not give any interest for the amount above Rs.1.5 lakh. Hence, you can invest the additional amount in other investment option that gives returns.
● If you have two PPF account (one on your name and other on your minor’s name) then the maximum amount that you can deposit for both the account is 1.5 lakhs in a financial year.
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