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Breaking down PPF
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Public Provident fund is a long term debt oriented investment scheme backed by the Government of India that offers attractive interest rates and returns that are exempted from tax. Introduced in 1968 by the Ministry of Finance, the interest rates offered on PPF are decided by the government every quarter in line with or above inflation rates at a premium of a 0.25% to 0.50% based on the rates of 10 year government bonds.

The aim of PPF is to channel the savings of individuals by offering them an instrument that carries reasonable returns along with tax benefits.  

Current PPF rate is 7.6% which is less than the 10 year government bond yield rate. Therefore the government is more adamant on borrowing through PPF than bonds as it would have to pay less interest on PPF whereas the rising bonds rates reached 7.9% in May, 2018. Government recently announced that it plans to borrow Rs. 2,88,000 crore through PPF in the first half of 2018 from the public and in total Rs. 6,05,000 in 2018, even when PPF interest payments will still create a large expenditure for the government.

Who can invest in PPF?

Any resident individual can invest in PPF in his name or in the name of their spouse or minor child. A minor can also invest through a guardian (who is alive). Any person acting on behalf of a Hindu Undivided Family or residents who have started investing in PPF can continue after they become NRIs. PPF account can never be a joint account, though nomination facility is available. PPF accounts can be opened in any post office or in select authorized national bank branches.

Features:

  1. Investment: A person can invest as low as Rs. 500 to a maximum of Rs. 1,50,000 during a financial year.
  2. Tenure: The lock in period for a PPF is 15 years. The maturity is calculated from the end of financial year in which the deposit was made, not on the account opening date.
  3. Loan facility: Loans can be availed against funds held in the PPF account from year 3 to year 6 for up to 25% of the balance available in your account in the second preceeding year in which loan is applied.  Interest charged is 2% more than the PPF rate.
  4. Withdrawal facility: It is available for every year from year 7. Complete withdrawal of funds can be made only at maturity.
  5. Renewal facility: Renewal or extension of the scheme is allowed, for an extra 5 years at a time, wherein one receives interest and can also make further deposit.
  6. Calculation of Interest: The interest of PPF is calculated as on the minimum balance between the 5th day of the month and the end of the month. Therefore, any investments should be made before 5th of every month.

Benefits:

  1. Tax benefits: Under Section 80C, deposits made up to Rs. 1.5 lacs can be claimed as deductions. No wealth tax is applicable on the PPF accounts and their proceeds. Also, interest earned from PPF deposits is tax free.
  2. Interest rates: Better interest rates available than fixed deposits where rates range from 3.5% to 7% in various banks.
  3. Advantage over Fixed deposits: Flexibility in making small investments in PPF as compared to huge amount being locked in fixed deposits.
  4. Safety: Backed by government of India, therefore no default risk.
  5. Flexibility: The ease of depositing money anytime during the year in the multiples of Rs. 5, allowing even low income earners to open a PPF account, with maximum of 12 deposits in a year.
  6. Investing Rs. 1 lac in PPF in 2006 have valued close to 17 lacs in 2016 which shows good compounded investment growth for investors. 

Breaking Down PPF

Investments in PPF proves to be better than investments in bonds as the rate of interest in PPF has been more than that in bond rates for the past 5 years.

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If an investor is looking for guaranteed returns, income tax benefits, flexibility in investment, minimal or no volatility in returns, risk free instrument backed by the government or looking to diversify their existing portfolio, then investments in PPF is a great option to consider.

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