5 MinsJuly 03, 2020
Among the various financial goals, one that requires special attention is your retirement corpus. It can also be a nest egg to help secure your children's future. You need to ensure that this money will be available when you need it. Hence, you
need an instrument that offers stable and secure returns over the long term.
One option is the Public Provident Fund (PPF) account, which offers tax exemptions as well as guaranteed returns over the long term. It is an ideal instrument to accumulate funds, enjoy tax exemption, and enjoy the tax-free corpus on maturity.
Let us see what the features and benefits of PPF are.
Since PPF is a government-backed investment, it is sovereign and offers guaranteed returns, making it suitable for those looking for safe and secure returns.
PPF enjoys the EEE (exempt-exempt-exempt) tax status. EEE means the amount invested, the interest earned on the amount, and the maturity amount at withdrawal, are all exempt from taxes.
PFF is a great tax-saving tool for those who are self-employed in the absence of deductions from their incomes such as Employee Provident Fund. Even those are salaried and enjoy benefits under the Employee Provident Fund scheme, can open a PPF
account. This way they can invest an additional amount (up to Rs 1.5 lakh) and earn higher tax-free returns.
You can even open a PPF account in the name of a minor. However, the total tax exemption (including the minor account) you can get is Rs. 1.5 lakh.
Long-term goals planning
PPF is a great tool to use to create long-term wealth. You can use the PPF to generate a corpus for your child's education or your retirement. Ideally, you should start investing in PPF as soon as you start earning and build a corpus over the
long lock-in period.
Ideally, you should invest up to the full investment limit of Rs 1.5 lakh as that will enable to you earn higher returns, given the tax-free interest accrual and tax-free withdrawal on maturity.
Option to invest regularly
You have the option to invest regularly, on a monthly, quarterly or six-monthly basis, by linking your PPF account to your Savings Bank account. There is no minimum limit on the instalments you invest in a year in your PPF account. You can invest
as many times you wish and whatever amount you wish within the overall Rs. 1.5 lakh limit. This ensures that you can invest small amounts of money, as per your budget, instead of waiting to accumulate a lump sum to invest.
Option to open PPF account online & instantly
Today, you can also open a PPF account online, by Aadhaar verification by linking it to your Savings Bank account, with a bank authorised to offer PPF services. This way you can deposit money every month by issuing standing instructions. You can
also view the balance as well as print out the account statements.
Other important points on PPF:
- Investments in PPF are exempt under section 80C of the Income Tax Act up to a limit of Rs. 1.5 lakh per year. If it exceeds Rs. 1.5 lakh, you will not receive any interest for the extra amount.
- As per regulations, if contribution of minimum amount in any given financial year is not made, you need to pay Rs 50 as penalty for each inactive year in addition to Rs. 500 for each inactive year’s contribution.
- A PPF account has a lock-in for 15 years. After 15 years, you have the option to extend your account by five years at a time. You can avail of this extension as many times as you choose.
- Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month. Interest is compounded annually and credited at the end of every financial year.
- The interest rate on PPF is fixed by the government and is linked to the 10-year government security. The rate may be revised every three months.
- Although PPF has a lock-in period of 15 years, you can make partial withdrawals every year after the seventh year financial deposits. You will have to, however, provide proper documentation.
- After your account completes five financial years, you can make a withdrawal if there is an emergency need for funds for medical or educational purposes.
- The maximum amount for pre-mature withdrawal is equal to 50% of the amount in the account at the end of the 4th financial year before the year of withdrawal or 50% of the balance in the account at the end of the fiscal year, preceding the
current year, whichever is lower.
- One crucial point to understand is that the financial year is calculated after the end of the current fiscal year. For example, if your first deposit was on October 5, 2019, the financial year calculation for PPF starts from April 1, 2020.
- You can’t close a PPF account before the term of 15 financial years.
[Also Read: How to Open a PPF Account]
Disclaimer: This article has been authored by The Source, a Mumbai-based content creation, and curation firm. Axis Bank does not influence the views of the author in any way. Axis Bank and The Source shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.