a public provident fund (PPF) is a long-term investment tool and one of the most popular choices of investors who want to save for their retirement fund. saving for retirement should be your top financial goal once you start earning. after retirement, your ability to earn money reduces significantly, but your daily needs expenses remain almost the same. hence, to enjoy a tension-free life after retirement, you must make a prudent and wise decision to save and invest during your earning days.
a public provident fund offers high-interest rates, keeps your principal safe, and also offers various tax benefits. the interest earned as well as the returns on public provident fund investments are tax-exempt under the Income Tax Act, 1961. hence, the public provident fund is one of those options that should be on the investment bucket list of every investor.
here are the top 5 benefits of the public provident fund that you should know about:
#1. PPF offers high-interest rates
when it comes to creating wealth, interest rates make a huge difference. it's extremely difficult to find risk-free investment options that offer inflation-beating decent returns. nowadays, where fixed deposit and recurring deposit rates are falling, the public provident fund is there to give you a decent return. PPF is one of the oldest schemes and the interest rate on the PPF is currently 7.1 percent. if you compare the PPF interest rate with the interest rates on bank FDs and RDs, you will find that PPF offers at least a 1 percent higher interest rate.
#2. PPF can help you create wealth
as per the Income Tax Act, you can make a tax-free investment of a maximum amount of ₹1.5 lakh every financial year in a public provident fund. you can start a PPF investment with as low as ₹500 each year. hence, public provident fund schemes are suitable for every type of investor. a public provident fund can also help you become a crorepati if you are disciplined and consistent in investing. let's assume that the PPF interest rate of 7.1% remains constant throughout your investment period. now, if you invest ₹10,000 at the beginning of every month, you may accumulate ₹1 crore in 28 years. if you check carefully, you would notice that you can earn ₹1.054 crores through PPF in 28 years, out of which around 72 percent come as interest and only ₹33.60 lakh is your overall investment over the 28 years. as per the rule, the PPF accounts mature in 15 years but you can choose to extend the maturity by a block of 5 years multiple times. you just have to submit an application form to the post office or bank branch requesting an extension of your PPF tenure.
#3. PPF offers tax-free interest income
the public provident fund comes under the exempt-exempt-exempt (EEE) tax category which means that the interest earned on the PPF investment is tax-free. when you compare it with other investment options you would realize that your post-tax yields fall dramatically in other investment instruments such as fixed deposits where the interest earned is fully taxable. hence, public provident fund schemes make a good investment option for long-term tax-free wealth creation.
#4. PPF offers tax benefits under Section 80C
with public provident fund investment, you not only get the benefit of a tax-free interest income at maturity, but you can also save tax annually under the Section 80C of the Income Tax Act. as per the income tax law, you can invest a maximum of ₹1.5 lakh annually in a public provident fund and claim tax-exemption under the Section 80C. the only disadvantage of a public provident fund scheme is that it has a lock-in period of 15 years and hence it's suitable only for the long-term investment goals such as retirement. In case of a financial emergency, you can choose to withdraw money from your PPF account after 5 years, but, you would have to pay an interest of 1 percent that would be deducted from the date of opening of the PPF account.
#5. PPF allows partial withdrawal, loan facility
in case of a financial emergency, you can take a loan or make a partial withdrawal from your PPF account. you can avail a loan between the third and sixth financial year of opening the PPF account. you can take a maximum of 25 percent of the total amount accumulated in your PPF account by the end of the second fiscal year preceding the year in which you applied for the loan. PPF account also allows tax-free partial withdrawals after the completion of the sixth financial year or from the beginning of the seventh financial year. however, you can make a maximum partial withdrawal of 50 percent of the account balance at the end of the fourth financial year preceding the year in which you applied for the withdrawal or 50 percent of the account balance at the end of the previous financial year, whichever is lower. PPF schemes are not only beneficial for long-term savings but also provide ample liquidity in case of a financial emergency.
Now that you know all the benefits of investing in a public provident fund, it's time to use an online PPF calculator to find out how much and how long you need to invest to live a financially secured life post-retirement.