Everything you need to know about public provident fund (PPF)

Public Provident Fund (PPF) is one of the popular, preeminent and most preferred investment destinations for many investors. PPF is one of the best debt investment instruments available in India that suits every kind of investor for one’s debt portfolio.

Opening a PPF account

PPF account can either be opened in selected bank branches or in a post office. The account opening requires basic submission of the KYC documents with a bare minimum investment of Rs. 500. An investor who plans a PPF account can open just one account at a time, in case if two accounts have been opened, the other one is considered irregular. The balance in the second account will not earn any interest unless both the accounts are merged with due approval of The Finance Ministry.

Interest rate

The current interest rate for PPF is 7.6% p.a. which changes every financial year in accordance with the Government bond yield. PPF is normally calculated on periodic basis on the lowest balance by the end of the 5th day and last day of the month. However, the total interest earned during the year end is calculated and credited to your PPF account during the year end only.

How does PPF function?

PPFs are considered to be the safest investment option since it is provided by the government of India and the earnings through interest are tax free. The only liability is, every year you ought to add in your account a promised amount that could range anywhere between Rs.500 to Rs. 150000. It is considered to be a long-term investment option because once you open a PPF account; you cannot withdraw money for a period of 15 years and a minimum of 6 years.

To elaborate with an illustration, assume you earn Rs. 50000 monthly out of which your expenses account to Rs. 30000. Your savings here are Rs. 20000 out of which you decide to invest an amount of Rs. 10000 into your PPF account. To calculate annually, the total amount becomes Rs. 120000. This investment after you complete a year, will give you a profit of Rs. 10000 (on 7.6% interest rate which iscompounded annually). Moreover, in your tenure of 15 years, the returns pile up and increase as a result of compound interest.

Tax benefit

The best part about investing in a PPF is, the interest earned on it is tax free. Whatever contribution you make in PPF, under section 80C, is eligible for tax deduction. Public Provident Fund is listed under Exempt-Exempt-Exempt (EEE) tax regime. Any withdrawals or maturity amount from PPF account is also exempted from tax.

Case of PPF account holder’s demise

In the occurrence of the death of the account holder, the balance amount in the account will be paid before the completion of 15 years, to the nominee or the legal inheritor of the deceased. The death benefit from PPF would be the accrued interest along with the contributions made. However, the legal inheritor or nominee is not allowed to continue with the same PPF account by adding their contribution.

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