PPF: Simple formula to generate a tax free return of 44 lakh

What is the Public Provident Fund (PPF)?

PPF is an initiative by the government of India. The objective is to encourage you and me to save a modest amount over a period of time. The intention is to enable you, to build a retirement corpus.

This is the safest investment tool available in our country, because it backed by the Central Government of India. This product is not only secure but also tax-deductible and the returns are fully exempt from tax.

Sounds impressive, let us get into the details:

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What are the primary features?

• The safest Investment product in our country.
• Tax benefits are available, not only during investment but also on Maturity
• The interest percentage is approximately known, therefore, we can determine the maturity amount and plan accordingly.
• Even Court order cannot take the money invested in PPF, even in case of business failure or personal guarantee. In short, your money will always be your money.

What are the Tax Benefits?

We can invest up to INR 150,000/- in a financial year and claim a tax rebate under section 80C of Income Tax Act.

The interest earned is entirely tax-free, EEE (Exempt-Exempt-Exempt)

Am I eligible to have a PPF account?

• If you are a resident of India, then YES, you are eligible to open a PPF account.
• You can open PPF accounts for your kids (minors) and be a guardian for the same.
• Joint account is not allowed, hence you should open individual account for self and spouse.
• PPF account is different from your Employee Provident Fund.

What about NRI’s?

Unfortunately, NRI’s are not eligible to open PPF account

What is the deposit Limit?

For Tax rebate the limit is INR 150,000/- however you can have Personal accounts for all your family members.

Example: Rajeev and Sonia have 2 minor kids Modi and Amit, here Rajeev is allowed to open one account for self, one for Wife (Sonia) one each for Modi and Amit. 

Rajeev can invest INR 150000/- in each account (150000 * 4), however maximum Tax Rebate will be INR 150000/-

Best time to invest?

• 1st  April to 31st March if you want to invest once a year
• 1 -5 April & 1-5 Oct if you want to invest twice a year
• 1-5 April, 1-5 July, 1-5 Oct, 1-5 Jan if you want to invest once a Qtr.
• 1-5 of every month if you want to invest every month. 

Please Note- 1st to 5th because interest is calculated on the lowest balance between 6th to month end.

So in simple words, deposit your money between 1 – 5th of the month or else do it in the next month. 

Example: You deposited INR 50000 in your PPF account on 7th of July.
As per the rule, the system will check the balance from 6th July to month end and interest will be paid for the lowest balance.
In our case, 6th July will have the lowest balance. 
Here we lose the entire interest for INR 50000/- deposited this month. 
Hence always deposit money between 1st-5th of the month. 

What is the Interest Rate?

Current Interest on PPF is 8%, however, this rate is not fixed. Central government announces the rate once in quarter.

   

Can I get a loan in case of an emergency?

YES, from the 3rd to the 6th year you are eligible to take a loan. The limit is 25% of your account balance.

Repayment has to be done within 3 years of taking it, you can pay one time or monthly.

What is the Maturity period?

PPF matures after 15 financial years, you can withdraw the entire amount with interest.

Can I withdraw my money before maturity?

• Partial withdrawal is allowed from the 7th financial year.
• One withdrawal per financial year.
• The limit is 50% of your account balance.

If I want to invest for more than 15 years?

• YES, you can extend the period in a block of 5 years and keep doing it every 5 years.
• During extension period you are eligible to withdraw money from your account only once in a financial year
• You can withdraw up to 60% of your account balance.

What if I want to close the account before Maturity?

• YES, you can. However, it is on an exception basis like serious illness, higher education of children etc.
• There will be a penalty of 1% on the interest of that financial year.

Eg 2018-19 PPF interest is 8% you will be paid (8 - 1 = 7%)

How to open a PPF account?

All Major Public sector banks offer PPF account eg: SBI, PNB etc. also few private sector banks like HDFC and ICICI bank helps you start a PPF account.

ICICI Bank gives an option to open PPF account online. If you have an account with ICICI make the most of it.

What amount can I expect after 15years?

Yearly Investment INR 150,000/-
After 15years assuming 8% fixed returns = INR 4,398,000/-

Conclusion:

•  Even if you have multiple investments running, we should always have one portion invested in fixed income product. 
• In the fixed-income category, PPF should be the number one option.
• Mutual fund data will reflect better returns in 10-15 years, however, it is always advisable to have some money parked in a PPF just for that unseen rainy day. 
• As this product has a lock-in, we are forced to hold our investment. 

Dear Readers,

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Thanks and I wish and hope you make a lot of wealth from your investments.

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Cheers 🍹

Intelligent Investor 

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