Saving and investing the saved amount in comprehensive investment instruments is the backbone of a successful financial plan. The investment options avoid piling cash in savings and ensure that your money works for you over time.
The Indian government has also curated safe investment instruments that offer higher returns than other market-linked ones to support Indian citizens in their wealth-building goals. A Public Provident Fund offers extensive benefits among numerous low-risk government-backed investment instruments.
The Public Provident Fund (PPF) is a government-backed scheme that provides numerous PPF benefits with a minimum investment of Rs 500 per year, which is capped at Rs 1.5 lakh annually. Individuals can open a PPF account in their name. However, no provision for a joint account exists for a PPF.
Using the scheme, investors save tax up to Rs 1.5 lakh annually under Section 80C of the Income Tax Act, 1961. Furthermore, the returns and the interest earned are not taxable.
A noted feature of the Public Provident Fund is its fluctuating interest rates that the Indian Finance Ministry, under the Indian government, sets every year after reviewing the market conditions. Under the PPF benefit, the interest payouts are deposited yearly in the investor's bank accounts on 31st March.
In PPFs, the interest is calculated on the lowest account balance between the fifth day’s closing balance and the last day of the month. Here are the year-wise interest rates of the PPF:
Benefits of PPF (Public Provident Fund): Why PPF Is Best Investment?
A Public Provident Fund is one of the most widely invested because of the PPF investment benefits it provides. The scheme’s maturity period is 15 years. It allows full withdrawal after five years for reasons, such as life-threatening diseases, higher education, etc. However, you can make a partial withdrawal after seven years.
Apart from these PPF benefits and features, below are further advantages that answer why to invest in a PPF.
1. Extension of Tenure
Although the scheme comes with a tenure of 15 years, investors can extend the tenure in blocks of five years. Investors are required to fill out Form H to extend their tenure after 15 years.
2. Tax Benefits on PPF
A major objective of tax-paying Indian citizens to invest in instruments such as PPF is to lower their total taxable income, thereby increasing savings.
The tax benefits are offered by the scheme under Section 80C of the Income Tax Act of 1961. As PPF investments fall under the Exempt-Exempt-Exempt (EEE) category, it provides tax deductions on the invested amount subject to a limit of Rs 1.5 lakh annually. Another PPF benefit is the tax-free nature of the accumulated amount and interest at the withdrawal time.
3. Investment Security in PPF
One of the best PPF benefits is the investment security provided by the Indian government through Public Provident Funds. Extending the PPF investment benefits, the Indian government backs all the investments made by investors with a sovereign guarantee.
With a sovereign guarantee, the government legally promises to discharge the liability and provide the invested amount along with interest payments to investors in case of default. Furthermore, the investment scheme backed by the Indian governmentis unlikely to have negative cash flow, making it one of the safest investment schemes available for earning returns.
4. Facility of Loans Against PPF
Many people rely on loan products offered by lenders to ensure they can protect their savings for future expenses and can still cover immediate expenses effectively. Loan products such as medical, housing, education, and business loans have allowed raising immediate and adequate capital to tackle financial emergencies without losing hard-earned savings.
However, lenders have created eligibility criteria for various secured loan products that require applicants to pledge any valuable asset as collateral to get their loan application approved.
A vital PPF benefit is its facility to work as collateral as per the amount invested by the investor for a certain period. You can leverage your PPF account and take loans between the third and the sixth year for a tenure of up to 36 months. The loan amount provided against the PPF amount can be 25% maximum of the total invested amount.
For example, if you have invested Rs 5,00,000 after the completion of the third year, you can take a loan against this amount, which will be a maximum of 25% of Rs 5,00,000, i.e., Rs 1,25,000.
Furthermore, the government has extended the PPF benefit of taking a loan against the PPF by allowing investors to take a second loan on the invested amount before the sixth year. However, you can take the second loan only after you have repaid the first loan completely before the sixth year.
5. Partial Withdrawals
The main objective of Public Provident Funds is to multiply the invested wealth through the compounding effect. Wealth-building aims to ensure adequate corpus to cover financial emergencies or high planned expenses. However, as life is uncertain, any eventualities may require immediate funds to cover the expenses.
The Indian government, under the PPF benefits, has created an option to partially withdraw the invested amount in PPF account in case the investors need immediate funds for personal expenses. However, some rules are set by the government for partial withdrawals in PPF.
Per the PPF withdrawal rules, investors can fully withdraw the invested amount only upon maturity, after the completion of 15 years from the date of starting the account. However, if investors need funds, they can withdraw a partial amount after the completion of the sixth year, i.e., from the beginning of the seventh year.
If any investors want to make a premature withdrawal, the PPF scheme allows a maximum of 50% of the invested amount till the completion of the fourth year. It means that you can withdraw 50% of the amount invested till the fourth year after completing the sixth year. Moreover, investors are only allowed to make a partial withdrawal once in a financial year.
6. PPF As A Pension Tool
The pension rule differs with employers as most private companies do not offer pension benefits to their employees. Hence, PPF benefits include investing in a PPF account to use the future corpus as a regular pension.
Since a PPF offers regular interest payments based on the set interest rate, the interest payout can become an alternative to a pension for individuals who do not have pension benefits in their current employment. This PPF benefit is highly advantageous for individuals to ensure a burden-free financial future without a regular income source.
7. Transparency in Calculation
PPF investment benefits not only provide return benefits but also create a system of utmost transparency. The Indian government sets the interest rate after duly reviewing the market scenario and communicates the interest rate beforehand to investors. The interest rate is paid automatically without delay at regular intervals.
8. PPF Can Help You Create Wealth
One of the most critical PPF benefits is its nature to help investors create wealth by multiplying their corpus after every interest payment cycle. Wealth creation is possible through the compounding PPF investment benefit that provides compound interest on the invested amount.
Rather than a fixed interest on the initial principal amount, PPF provides interest on the principal amount plus all the interest paid till now, thereby creating wealth in the process.
Disadvantages of PPF
Although the PPF benefits outweigh the few disadvantages of PPFs, here are a few drawbacks of PPF.
● Fixed Interest Rate: Although the Indian government regularly reviews and changes the interest rates, once set, the rates remain fixed for a certain period. In the case of high inflation, fixed interest rates may force investors to lose a chunk of their investment value.
● Lower Returns Than Mutual Funds, NPS: Public Provident Fund is not market-linked and does not base the interest rate and returns on an underlying asset such as equities. However, investment instruments such as mutual funds and National Pension System (NPS) have an equity component and may offer higher returns in a bull market.
● Less Flexible: Compared to other investment instruments, a lower flexibility undermines the PPF benefits. PPF has numerous limitations on the withdrawal amount, which is also capped at 50% of the total investment. Furthermore, the withdrawal process requires various calculations and submission of forms, making it a tedious task.
The PPF is an investment scheme where the government has never defaulted in interest and principal payment, making it one of the safest non-market linked investment instruments. However, as there are some disadvantages, you must analyse every aspect of the PPF investment process before investing.
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Frequently Asked Questions
Yes, PPF is a good investment in 2023 as it is offering 7.10% as the interest rate, which is higher than the prevailing inflation rate of 5.88%.
PPF is one of the safest investment instruments backed by the government to offer regular returns on the invested amount. If you are looking for a safe, non-market-linked investment instrument with negligible default risk, you can invest in PPFs to earn high returns.