The Public Provident Fund, or PPF, tends to put people off because of the lengthy tenure of the instrument. But its benefits make a compelling case.
1. The return is guaranteed
The return is assured but flexible. You are promised a fixed return every year, though the exact figure fluctuates annually. From 12% per annum, it got lowered to 8%. The returns are reset every fiscal year and are benchmarked against the 10-year government bond yield. In 2012-13, the rate as fixed by the RBI was 8.8% per annum and is 8.7% per annum this fiscal.
2. It does not get safer than this
Since PPF is backed by the central government, it offers the highest level of security one can get on any investment. Moreover, investments in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder.
3. Tax exemption all through
You get a tax exemption under Section 80C, up to Rs 1 lakh, when you invest in this instrument and the interest earned is also tax free. The interest is added to the principal investment and compounded, and the accumulated amount is exempt from tax on maturity. It falls under the EEE category, which indicates that it is exempt from tax in all the three stages.
4. No restriction on mobility
Individuals can open a PPF account at any branch of State Bank of India, its associated banks, certain nationalized banks, and the post office. If shifting residence, intra city or to another city, the account can be transferred to a bank or “account office” that the account holder chooses.
If an individual attains the non-resident Indian, or NRI, status after the account has been opened and is functional, he can continue with the account till maturity. But the money in a PPF account CANNOT be repatriated.
5. Wide range of flexibility
The range of investment is fairly wide. The minimum investment under PPF is Rs 500/annum and it can go up to a maximum Rs 1 lakh, which is the limit under Section 80C. The amount does not have to be invested at one go but can be done in maximum 12 installments in a year. If you struggle with cash flows, this aspect takes care of it.
6. A smart savings tool
The tenure of the instrument is lengthy at 15 years. But this can work to the investor’s benefit as a smart savings tool with total tax benefits.
For instance, if you are 30 years old when you open an account, on maturity the money will come in handy for your child’s higher education or some such goal. If you are viewing it as a retirement kitty, then on maturity, extend it by a 5-year block.
There is a way out for those who desperately need some liquidity during the tenure of the investment. After the expiry of the 5th year from the date that the initial subscription is made, an account holder can make premature withdrawals. After the third financial year, excluding the year of the deposit, an investor is even allowed to take a loan on his investment.
