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PPF stands for Public Provident Fund. It has been introduced in 1968 for the aim to mobilize small savings into an investment with reasonable returns with additional benefits to save tax. It helps one build a retirement corpus. The current interest rate on PPF is 8% compounded annually. PPF is backed by the government of India and the risk involved is very minimal and it offers guaranteed risk-free returns. Also, it falls under EEE status which means that the amount invested, interest earned and maturity amount received are all tax-free.
PPF has a minimum tenure of 15 years which can be extended indefinitely in blocks of 5 years. Furthermore, the minimum investment in PPF account is Rs 500 and maximum is Rs 1,50,000. Investments can be made in lump sum or in a maximum of 12 installments. Deposits into a PPF account have to be made at least once a year for 15 years.
It’s easy to open a PPF account. All one needs is to submit an application form along with KYC, address proof, identity proof, and signature proof. A PPF account can be opened with a Post Office or any other nationalized banks. Some private banks are also authorized to help open PPF accounts. Amount invested in PPF account is locked in for 15 years. But there is an option to withdraw money from the start of 7th year, after completing 6 years. One can withdraw the amount once a year.
Section 80 C of the Income Tax Act, exempts certain investments and expenditures from being taxed. It allows deductions up to Rs 1,50,000, irrespective of your tax bracket. Small investments in savings schemes like PPF, Life Insurance, NSC, ELSS, Pension Plans and Infrastructure Bonds qualify for deduction under 80 C.
PPF is a small savings scheme offered by the government of India through banks. Investments made in PPF have a lock-in of 15 years and give a fixed return according to the interest rate published by the Ministry of Finance every quarter. The interest rate on PPF stands at 8% effective from 1st October 2018 as per the latest govt. notification.
Tax-saving ELSS Mutual funds are eligible for tax deductions under Section 80 C. These funds invest in stocks and are hence linked to stock markets. These funds have a lock-in period of 3 years (lowest of any tax-saving option) and hence the investors can not withdraw their money before the 3-year period. These are the only Mutual funds that have a lock-in.
EPF is a deduction that the employer makes from your salary, this contribution forms part of 80 C.
Fees paid towards full-time education of your children can be claimed as part of 80 C deduction. This means fees paid to an educational institution, college or school. This deduction can be availed for a maximum of 2 children. And not for, your own education or your spouse’s education.
Principal amount repayments on your housing loan are deducted under 80 C.
Life insurance premium paid in the year can be claimed for deduction. Premium paid for yourself, your spouse or your children can be claimed under 80 C. You can have more than one life insurance policy and premium paid for all are eligible for deduction.
Tax-saving FDs are a special category of FDs which have a 5-year lock-in period. Unlike regular FDs, premature withdrawals are NOT allowed from Tax-saving FDs. They qualify as an 80 C tax-saving instrument and thus investments up to Rs1,50,000 p.a. are exempt from income tax. However, the interest on these FDs remains taxable as per your income at marginal income tax rate. TDS of 10% also applies.
ULIPs are a variant of traditional endowment plan. ULIPs have a high premium. They offer investment in mutual funds along with insurance, therefore, there are many charges towards these. The charges on ULIPs are funds allocating charges, fund management fee, policy administration fee, fund switching charges, and agent fees.
Though the upper limit of 80c investments is 1.5 lakhs, you should check how much you need to invest in PPF and also how much you can reduce in taxes with this investment. The minimum amount of investment is Rs 500 and maximum of Rs 1,50,000. Though PPF offers guaranteed returns, it isn’t advised to invest entire amount in this. This investment comes with a 15-year lock-in period.
PPF is the best option for investors who are looking for long-term investment, are risk averse and looking for guaranteed returns. For investors who are looking at higher returns are willing to absorb some risk can explore other options. PPF is tax efficient. It falls under the EEE status of 80C. The investment, interest and maturity amount is tax-free. Easy deposits can be made in 12 installments in a year. PPF offers flexibility in deposits.
Upwardly’s PPF calculator is a tool where one can find out the loan they can avail against their PPF investment and how much can they withdraw from the start of year7.
One can start taking a loan on their PPF from 3rd financial year of opening their account. The loan can be availed up to the 6th financial year of opening the PPF account.
Another important thing to note is that the loan can be taken on 25% of the balance amount available in the previous year. The tenure of the loan is 36 months and it has to be repaid during this time. The interest on the loan is linked to the return on PPF. It is 2% more than the return on PPF. With the current rate of return being 8% the interest on PPF loan is 10%.
A PPF account can be closed only upon maturity i.e. after 15 years. Upon maturity, the entire amount along with the interest earned can be withdrawn and the account can be closed. However, partial withdrawal from PPF account can be done every year from 7th financial year after opening the account. Hence the PPF amount can be withdrawn yearly on a regular basis. This withdrawal mustn’t exceed 50% of the balance at the end of the 4th year or 50% of the balance at the end of immediate preceding year whichever is less. One can keep infusing new investment even during withdrawal or loan period.
Returns of PPF are guaranteed by the government. When PPF was introduced it gave returns of 12% per annum. Now returns from PPF are 8%. Even with guaranteed returns, one cannot solely depend on PPF as an investment avenue as inflation will eat up the returns. For investors who are risk averse and looking for tax saving, PPF can be the best option. But for risk lovers, there are certainly other options to explore. The best among them is ELSS fund which also a tax saving investment option.
Returns from ELSS funds are market-linked and hence there are no assured returns. Yet, historically average ELSS funds have generated healthy returns of ~15% over the long-term while the good ones have given 20%! One can expect 12–15% returns from ELSS if remaining invested for 7–10 years.
Mr. Anirudh has invested Rs 1,50,000 in PPF and his friend Ms. Annanya invested Rs 1,50,000 in ELSS. Both of them have stayed invested for 15 years. Following table shows the returns of both before and after inflation (4%) and tax.
|Amount Invested||Rs 1,50,000||Rs 1,50,000|
|Maturity Amount (Pre Tax)||Rs 4,75,825||Rs 9,38,141|
|Maturity Amount (Post Tax)||Rs 4,75,825||Rs 7,54,326.9|
|Post Inflation Returns (Pre Tax)||Rs 2,70,142||Rs 5,46,373|
|Post Inflation Returns (Post Tax)||Rs 2,70,142||Rs 5,01,735.7|
The returns are higher in case of ELSS both and after inflation and tax. Despite being subject to a tax of 10% on long-term gains, ELSS stands out as a clear winner.
As you can also see in this image below, how 1.5 lakh invested annually in ABSL 96 Tax Relief ELSS fund for last 20 years compares with the same investment done in PPF. While ELSS investment grew to a massive ₹5.67 crores, PPF investment just grew to a mere ₹86 lakh!
Therefore, let it be a lump sum investment or a SIP investment, returns from ELSS are higher which can beat inflation. ELSS funds don’t just beat PPF in returns but also on lock-in. ELSS funds have a lock-in of 3 years whereas PPF has 15 years. After 3 years there is no restriction on the withdrawal of the amount invested. Also, the investment in ELSS can be done by Indian citizens including NRI’s whereas only citizens of India can invest in PPF. NRI’s can’t invest in PPF.
According to a recent notification by the Government of India, NRIs will not be able to open the new Public Provident Fund (PPF) account. However, can hold an existing PPF account till maturity. Now, NRIs will also get the same interest rate on PPF as resident Indians. The PPF interest rate is at 8%. NRIs can continue to invest up to ₹1.50 lakh per annum in PPF until it reaches the 15-year maturity period.
NRI’s can withdraw PPF through a 3-step process:
Find the PPF withdrawal request form from your bank’s website. If you can’t find it, then just type a simple letter mentioning that you want to withdraw the entire amount from your PPF account addressed to the bank where you hold the PPF account in. Mention the following details: PPF account number, date of the initial subscription, and the account number and IFSC of the bank account where you want the proceeds to go. The details should be of your NRO account.
Courier the signed PPF withdrawal request to your relatives, parents, or siblings in the city where you have the NRE/NRO account. Provide an authority letter mentioning that you are allowing the person to follow the withdrawal process on your behalf. Also, send your identity/address details and statements of your NRO account and PPF account.
The person on your behalf has to go to the bank where you have the NRE/NRO account. They have to attest these documents. After attestation is done, then the person has to visit the PSU bank for PPF withdrawal. The bank will accept the documents which are attested by your bank.