Public Provident Fund: Why PPF may still be your best bet

Investments in PPF need to be made keeping in mind long term goals such as retirement, child education, marriage, etc. It is also a long-term commitment investment, as it comes with a lock-in of 15 years.

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In the last couple of years, interest rates have fallen a lot and it has been extremely difficult for investors to find investment avenues that give decent returns. One of the most popular options – bank fixed deposit – has also been offering low returns. Keeping all this in view, the Public Provident Fund (PPF) – one of the oldest schemes – still seems to be the best bet right now.

Why PPF? It is one of the safest debt instruments as it has sovereign backing of the government. Many investors use PPF to meet the debt part of their investment portfolio. Along with its tax benefits, the most attractive benefit of PPF is, it offers one of the highest returns amongst fixed income options. It is also a long-term commitment investment, as it comes with a lock-in of 15 years. Through PPF the maximum amount of investment is set at Rs 1.5 lakh every year, and the minimum investment that can be made is Rs 500 each year.

Hence, investments in PPF need to be made keeping in mind long-term goals such as retirement, child education, marriage, etc. After the mandatory lock-in of 15 years, investors can choose to continue with their account either by continuing to invest or without any further investment. One can extend the account in a block of 5 years, to 20, 25, 30 years, and so on. One major disadvantage of PPF is that electronic means of encashing or using technology is not available.

Reasons why you should invest in PPF now:

1. Offers high-interest rates – Currently, PPF offers interest rates at 7.1 per cent, which is higher compared to interest rates offered by banks on their FDs. State Bank of India is offering 5.10 per cent on their 1 year FD, ICICI Bank offers an interest rate of 5.15 per cent on their FDs, HDFC Bank offers 6.30 per cent and Axis Bank offers 6.40 per cent. Note that the maximum interest rate offered is around 6 per cent. Hence, the interest rates offered by PPF is over and above the interest rates offered by some of the larger banks.

2. Tax-Free Interest income – Interest earned on the Public Provident Fund is tax-free for investors. With bank deposits, the interest earned from them is taxable, which affects the highest tax bracket individuals the most and they tend to lose a lot. With other instruments the post-tax yields fall dramatically, making PPF a good choice.

3. Tax benefits – Other than the interest income of PPF being tax-free in the hands of investors, it also offers tax benefits under section 80C. With that, the sum of Rs 1.5 lakh invested every year by an investor qualifies for tax benefits. Various investment instruments offer the same tax benefits, PPF is one of them. With PPF an individual can also withdraw their invested amount after 5 years, with a penalty of 1 per cent.

4. Safety – This small savings scheme offers high safety as it is backed by the Government. There have been cases in the past where banks have had problems in paying back deposits on demand. Hence, investors look for an investment that has a high amount of safety, and PPF is one of them.

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