Public Provident Fund is one of the most famous options (next to EPF) for investing your money in a secure, Government backed investment instrument. This investment option can be used for tax benefits under the income tax section of 80C subject to the limit of 1 lakh. Investment in PPF is one of the few investments where the returns are tax exempt. Because of tax exempt feature PPF investment has become a favoured investment among individuals and salaried class.

Please note that it is different from Employee Provident Fund (EPF) for which you and your organization invest directly to EPFO (Employee provident fund organization). For PPF, you are the only one who contributes.

Key Features of PPF

PPF normally gives 8% interest. This rate doesn’t change very often and hence it is one of the recommended options for investment. There is assurance of safety of the principal and there is a decent return too. PFRDA regulates the EPF rate of return and normally it directly impacts the PPF rates too at times and there is a positive correlation between PPF and EPF rates.

  1. Investors can deposit anywhere between Rs 500 to Rs 70000 in a year. The investors can also pay any amount anytime in a year subjected to the condition that the amount invested in a year will not exceed Rs 70,000 and 12 instalments in a year.
  2. The tenure of deposit is 15 years. However, you can extend this in a block of 5 years every time you want to extend.
  3. After 7 years, you have option to withdraw 50% of the amount invested till the 4th year. At the same time you can get loan up to 25% of the deposit between 3rd and 6th year.
  4. The investment is safe from any personal liability. Hence no institution can touch PPF deposit against your liability.

How to Start

PPF account can be opened in nationalized and private banks and post offices. Most of the banks such as SBI, ICICI, Bank of Baroda, BOI, and others offer PPF service. All you have to do is to go any of these banks’ branches and request a PPF form and fill it.

PPF can be opened in your name. If you have minor children, you can open it in their name so that when they become adult, you can use the accumulated fund for their education or home.

Word of Caution

Do not open two accounts in your name. This is not legal. Your other account will be closed and only principal will be returned with some penalty if the institution comes to know about your multiple accounts. The best course would be to open in the name of your spouse and children. But when you open PPF account in your spouse’s name, the combined sum (if you also have a PPF account) cannot exceed Rs 70,000 an year. For minor kids though, you can open separate PPF account and invest maximum of extra Rs 70,000 an year.

Joint accounts cannot be opened. One account can have only one holder. You could name a nominee though. The nominee should claim the PPF money immediately in case the account holder’s demise.

Making most of PPF

Public provident fund is one of very good option for building wealth in long term. Some of the steps you can take to make the most of PPF are as follows:

  • Invest the maximum amount (Rs 70,000 an year) if you can afford. Build a discipline to deposit this sum consistently. Since we are habituated to think in monthly term, make a habit of depositing monthly (or quarterly as the situation is). The important point is to be consistent. If you skip, the account may be blocked. If you want to reopen it, you can do it with a nominal penalty of Rs 50 and Rs 500 towards your minimum payment for PPF for every year. The penalty looks nominal but you should avoid skipping the payment at any cost.
  • Open the PPF account early, as soon as you get your first few pay checks. The magic of compounding works in the favour of those who start early. You must build a discipline to deposit the sum in your PPF account in the beginning of the month. This will build the much needed discipline to focus on long term objective. It will also give a better return as the interest is calculated on the minimum amount in your account between 5th and the last day of every month.

Let’s look at an example of how the magic of compounding works in case of PPF.

Monthly amount invested

Yearly amount invested

No of years in the term

PPF returns

Final Sum at the end of the term (approx.)

5833

70000

15

8%

20.2 lakhs

5833

70000

20

8%

34.3 lakhs

5833

70000

25

8%

55.5 lakhs

5833

70000

30

8%

86.9 lakhs

  • As far as possible, avoid withdrawing PPF money and taking loan against the deposit for two reasons. One, it breaks the discipline of not touching long term assets for short term needs. Two, it impacts the final sum.
  • As shown earlier, you can extend the investment period in block of 5 years at a time. The final sum increases dramatically as you invest for longer period of time. You can also leave the money at bank after the maturity period without investing more. The compounding will work on the sum valued at that point in time.

Conclusion

PPF is recommended for people who want to invest in risk free asset and can be used for various purposes. For example, you can open a PPF account in the name of your child and matured amount can be used to finance higher education when he or she is ready to go to college. You can also open PPF account in your daughter’s name and use this money in the time of her marriage. You can open two accounts in your and your spouse’s name subject to the limit of Rs 70,000 a year and use the money to buy home in future.

 

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