Friends, today we will talk about a top-rated financial product. I am saying this because this product is 52 years old.
I am talking about the Public Provident Fund, which is also known as PPF. PPF is so famous that generations of taxpayers have been benefiting from it.
What is PPF Account?
The features of PPF are simple yet very powerful. PPF was launched in 1968 to provide savings option for retirement to people who were working in the unorganized sector and didn’t fall under the scope of Employee Provident Fund i.e., EPFO or the government pension scheme.
This scheme was also made available through post offices, so that maximum people in the country could take advantage of this scheme. PPF is a long-term investment and savings product.
To start savings in PPF, you need to open aPPF account in any post office or selected branches of government/private banks. The amount invested in a PPF account earns a guaranteed return.
Besides, under Section 80C of Income Tax Act 1961, the benefit of income tax exemption can be availed for an amount of up to Rs. 1.5lakhs invested in a financial year.
The non-risk takers and people looking for guaranteed returns, prefer to save in PPF as it allows them to save tax by claiming tax exemption under Section 80C.
Now let us understand what a PPF account is and how taxpayers can take advantage of this financial product.
How Taxpayers Can Take Advantage of PPF?
You can open a PPF account at any post office or an authorized bank. Only Indian residents can open a PPF account. A joint or Hindu Undivided Family (HUF) can not open a PPF account.
The most important thing to know is that an individual can open only one PPF account. Besides filling up the account opening form, you are required to provide a passport size photograph, a xerox of identity proof (likePAN card, driving license, aadhaar card, etc.), address proof (like electricity bill, passport,aadhaar card, etc.) to open a PPF account.
A PPF account is opened for 15 years. Thus, your deposited amount is locked-in fora period of 15 years. However, keeping difficult times in mind, and under special conditions, a PPF account holder can close the account before the end of the lock-in period.
Medical treatment of the account holder, spouse, children, or parents is also included in these special conditions. For this, all the supporting documents and medical reports from the doctor or hospital confirming the medical condition must be submitted.
An account holder can also close the PPF account before the lock-in period to pay the fee for the higher education of self or children dependent on him/her.
To avail of this facility, the account holder has to produce fee bills along with the admission proof from a recognized university in the country or abroad. If a PPF account holder settles abroad, he/she can submit a copy of passport, visa, or income tax returns and can close the account.
A loan can also be availed against the PPFaccount amount. The interest rate for this loan is 1% higher than the current interest rate offered on a PPF account.
Minimum Investment Amount
You can open a PPF account with just Rs. 500. A minimum amount of Rs. 500 is to be deposited every year during the 15-year tenure. A maximum of Rs. 1.5 lakhs can be deposited in a PPF account during a financial year. You can deposit this amount by cash, cheque or online mode.
A deposit of Rs. Five hundred should be made every year to keep the account running. A penalty of Rs. 50 per year is levied for the period that you are unable to make a deposit. With this, you will have to deposit a minimum amount of Rs. 500 per year.
Apart from this, a minimum amount of Rs 500 will have to be deposited as a subscription for the year in which you are reopening your account.
A taxpayer can claim a deduction on an amount up to Rs. 1.5 lakhs deposited in the PPF account under Section 80C of the Income Tax Act.
The interest earned on the PPF account is also tax-free. Thus, the amount that you deposit in a PPFaccount allows you to claim tax exemption under Section 80C, plus the interest earned every year is tax-free, and the maturity amount is also tax-free.
This tax benefit is known as the EEE benefit, which means your investment, returns, and maturity amount are all tax-free.
The current interest rate of PPF accounts is 7.9%. The interest accumulated is deposited in the account at the end of the financial year.
The government reviews the interest rates on a PPF account once every three months, and the most important thing is that this interest is guaranteed. This interest rate is the same for all the banks and post offices as the government decides it.
It is important to mention a different feature of PPF accounts here. A court order cannot attach the amount deposited in a PPF account even if the account holder is legally liable for a loan.
This makes PPF a unique and safe investment option. But, should you invest in a PPF account? There is no doubt that an investment in aPPF account allows you to save tax under Section 80C, but many things have changed in the last five decades.
There are many new tax-saving products in the market today, which are better than PPF. Now, let us tell you why the popularity of PPF is decreasing.
Alternative To PPF
A lock-in period of 15 years is a very long tenure for any tax saving product, especially when the lock-in period for most saving products for 5 years. Also, a constant decrease in the returns offered by a PPF account is making it less attractive.
If you consider PPF as a retirement product, then maybe it will take you towards poverty in your old age as the inflation-adjusted returns offered by a PPF account are very low. The right approach would be to choose market-linked saving products.
The special feature of market-linked returns is that it allows you to beat inflation in the long run. There are two market-linked tax-saving products.
One is the National Pension System (NPS), which focuses on retirement, and the other is Equity Linked Savings Schemes (ELSS), which helps in wealth creation in the long run.
Though the lock-in period of NPS is longer when compared to PPF, it is better than PPF in two aspects. Low liquidity does not allow you to withdraw funds repeatedly from your retirement savings in case of any emergency.
The second advantage is that NPS provides you the option to choose investment funds. On the other hand, the lock-in period of ELSS is only three years, and it invests a minimum of 80% in equity.
Many investors get attracted to this product due to the shorter lock-in period. However, good returns can be earned if a person invests for a longer period in ELSS Mutual Funds.
Taking the capability of offering better returns into account by other products compared to the 15-year long term PPF, it can be said that new taxpayers should choose other options over PPF.
For those who already have a PPF account, it would be a good idea to invest the minimum Rs.500 in this account and the maximum amount in ELSS.