PPF: How to make it work for you

By Larissa Fernand |  05-02-19 | 
 

Whenever the Public Provident Fund, or PPF, is suggested, what instantly acts as a mental deterrent is the long holding period – 15 years. Many people balk at the very thought of parking their funds in an investment which they cannot access for a great length of time.

While understandable, it undermines the fact that 15 years is a blip on the investment radar when it comes to long term goals.

How long is the money locked in?

If you think 15 years is agonizingly long, let me clarify. Yes, PPF is a 15-year investment, but it has a 16-year lock-in. It may sound contradictory, but that is only because the first year is not taken into consideration when looking at the maturity of the account. The end of the financial year in which the deposit was made is what matters. To that extent, the month or date is irrelevant.

  • Account opened: July 15, 2000
  • The 15-year tenure will commence from end of FY2000-01: March 31, 2001
  • Maturity: March 31, 2016

Another example:

  • Account opened: September 28, 2014
  • The 15-year tenure will commence from end of FY2014-15: March 31, 2015
  • Maturity: March 31, 2030

For those who have no problem with the tenure, there’s good news. On maturity, the account holder can extend the period of the PPF account in a block of 5 years (nothing less, nothing more). Technically speaking, the account can be extended for infinite number of blocks of 5 years each. It will continue to earn the prevailing interest rate even if you do not make any contributions.

Can you exit in an emergency?

Indeed. You can opt for a premature closing of the account if certain conditions would have to be met.

  • The account should have completed a minimum of 5 financial years.
  • You need to access the funds for medical treatment for yourself, spouse, dependent parents or children. In such a situation, you will need to provide supporting documents signed by a registered medical practitioner.
  • You need to access the funds for higher education expenses for yourself or children. Here too you will need to provide supporting documents.

If you can justify closing the account, you can do so. But you will not get the amount shown. The interest rate will be adjusted accordingly. You shall get 1% less than the stated interest rate.

For example, the interest rate you would have earned in FY2011-12 would have been 8.6% and the next year, 8.8%. The amount will be recalculated to show interest rates as 7.6% and 7.8%. As you will comprehend, this will hit your kitty to some extent.

Should you lock your money in for such a long period?

Let’s put it another way. What is stopping you from investing for such a long period?

Safety

The investment is as safe as it gets. Any sovereign backed investment (which means it is issued by the national government of a country) stands for the highest safety. Since the funds in PPF are backed by the central (not state) government, the investment does not get any safer than this; the underlying assumption being that the government will not default on its payment obligation.

Return

The return is assured and compounded annually. So let’s say you invest Rs 1,50,000 earning 7.6% per annum. At the end of the first year, you will earn Rs 11,400 and the total balance will amount to Rs 1,61,400 (1,50,000 + 11,400). The next year, when you invest Rs 1,50,000 again, it will be added to Rs 1,61,400 and interest will be paid on the total amount (Rs 3,11,400), taking it to Rs 3,35,066. Compounding has this benefit.

Imagine this going on for 15 years.

Let’s say you invest Rs 1,50,000 for 15 years earning 7.6% per annum. Your final balance will be over Rs 42 lakh. Extend this for 5 years. Now imagine the amount that you will earn as interest on such an accumulated kitty.

Tax break

You get a tax break all the way – in tax parlance, it falls under the Exempt-Exempt-Exempt (EEE) classification. The investment up to Rs 1.50 lakh per annum is eligible for deduction in a financial year. The interest earned is exempt from tax. The amount on maturity is exempt from tax.

The PPF is an excellent long-term savings tool. It is a great way to accumulate money for a goal. For instance, if you are 30 years old when you open an account, on maturity the money could come in handy for your child’s higher education.

If you are viewing it as a retirement kitty, then on maturity, extend it by a 5-year block. Or, if you are your spouse are each managing your own PPF accounts, one account can be used for retirement savings, the other for another goal – such as child’s education or marriage.

Do consider hitching your wagon to this investment.

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