Public Provident Fund (PPF) is a Central government debt scheme offered by many banks and post offices across the country.
It allows individuals to deposit a minimum of `500 or up to `70,000 per year for tenure of 15 years. Currently, it provides eight per cent interest on deposit.
This means if you deposit an amount of `5,833.33 (a maximum amount of `70,000 a year) every month, you will have a balance of atleast a minimum of `20 lakhs in 15 years as per current interest rate of eight per cent. Don’t forget it gets compounded.
Advantages
* There is no risk attached with the investment.
* PPF is very flexible. You can deposit at your convenience and frequency as long as you deposit minimum of `500 per year. However, you cannot have more than 12 instalments and more than `70,000 deposit in a year in your name.
* You can open different accounts for your minor children which will help you start an early saving for them.Compounding works best with a very early start and thus your children can be greatly benefited. As per PPF rules, the total deposit in your own account and in the account of your minor children should not be in excess of `70,000 in a financial year.
However, PPF rules do not bar you from making additional deposits beyond this limit in the accounts of your major children or spouse. This is especially beneficial if you want to claim tax benefits to the tune of `1 lakh under Section 80C on the basis of your PF contribution alone. Do note that you cannot do the same for the PF accounts of your parents.
* Falling under the Exempt-Exempt-Exempt (which continues to remain so after the new DTC) category this is most beneficial from a tax savings perspective. One can avail tax benefits under Section 80 C but comes with a limit of `70,000 including the amounts invested for one’s children.
* There is no wealth tax on the value of the fund.
* In case of insolvency, the money will still be safe with you and will not be attached to your assets.
Drawbacks
* Even though the interest rate is eight per cent compounded annually with the current levels of inflation, the returns are low compared to long-term equity investments, which come with more risks but with more returns as well.
& PPF being a debt instrument does not offer capital appreciation.
* It scores low on liquidity with a lock-in period of 15 years, which can be extended to five year blocks indefinitely till the demise of the account holder. Withdrawals can be once a year from the seventh year onwards limited to 50 per cent of the average of the last three year period’s fund value.
Things to avoid
* You should not open two accounts in your name. If the bank or the post officecomes to know about it, all other accounts except one will be closed and only the principal part will be returned.
* You cannot open a joint account with another adult.
* You should deposit money before the fifth of every month to take advantage of interest as interest is calculated on the minimum amount betw-een fifth and the end of every month.
* If you are a nominee and the account holder is no more, withdraw the amount as soon as possible because a nominee cannot nominate another. If the purpose of PPF is not yet met, withdraw the amount and start a new PPF account in your name.
How to make the most of PPF
* Like any investment, you should start early in PPF. Start the moment you get a job.
* This will build a substantial balance by the time you are in mid-30s. This can be used to pay for your home or your kids’ education.
* PPF should be a part of your overall portfolio as it will reduce the volatility. At the same time, you should treat PPF very similar to employee provident fund. Try not to access this money till the maturity. This can be one of your effective retirement planning options.
(The writer is the CEO of bankbazaar.com)