There is plethora of investment options amongst fixed income category but one that has stood the test of safety, decent returns and tax efficiency is PPF or Public Provident Fund. Since it is backed by government it is risk free and is an excellent tool for long-term investment planning. This should be a significant part of your portfolio especially if you are self-employed.
What is PPF (Public Provident Fund)?
It is easy to open a PPF account. You can open it in any of the nationalized banks and post offices. Some private banks like ICICI bank too allow you to open the account. The minimum and maximum investment under this option is Rs 500 and Rs 150000 per financial year respectively. This can be at one go or in installments. However, there shouldn’t be more than 12 installments. If you fail to maintain a minimum balance your account can be discontinued. To activate it again you are required to pay a small penalty and arrears. The account matures in 15 years.
The good news is that the investment that you make in PPF is eligible for tax deduction under section 80 C. Also, the interest accrued is tax-free. The rate of interest is linked to the government bond yields. For years it has been hovering between 8 and 8.5% per year. At present it is 8.7% per annum.
So if you remain invested for 15 long years, you can accumulate a huge corpus, which is tax-free. Say for instance, you invest Rs 70000 annually. At an average rate of 8 % you would have Rs 22.92 lakhs tax-free on maturity. In case you fall in 30% tax bracket, you would save approximately Rs 21000 in tax every year.
How to maximize earnings by investing in PPF?
Gift to your spouse
Any income generated from the money gifted to your spouse is clubbed with your. But this is not the case with PPF. If the money given by you to your spouse is invested in PPF, the interest so accrued is tax free. So it will not push your tax liability. So you can invest more than annual limit of Rs 150,000 a year in this tax-free haven by gifting to your spouse.
Build a corpus for child education
If you want to build an educational corpus for your child, you need not look further. You can open a PPF account in the name of your minor child. However, the combined contribution to your and your child’s account cannot exceed the annual limit of Rs 150000 a year. Upon reaching 18 years of age, the combined limit is waived off. Up to 150000 a year can be invested in his name separately.
The interest is compounded annually and credited at the end of the year but the calculation for your PPF account is done every month. This is between last day of the month and 5th of the next month. This is on the lowest amount between these two dates. So if you don’t deposit in between these two dates, you won’t earn any interest for the month. Remember it.
Though PPF matures in 15 years time frame, you can withdraw from your PPF account in case of contingency. However, you can withdraw only after the sixth year and it cannot exceed 50% of the balance at the end of fourth year or the immediate preceding year, whichever is lower. This is possible only once a financial year.
Invest beyond maturity
You can reap the benefit of PPF account even after its maturity. A PPF account can be extended in blocks of five years indefinitely. This way you can build a larger corpus.