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Public Provident Fund (PPF)

Introduced in India in 1968, Public Provident Fund (PPF) has an objective to mobilise small savings in the form of investment, with a return attached to it. This is also called a savings-cum-tax savings investment vehicle which helps individuals enable to build a retirement corpus while providing them an opportunity to save on annual taxes. If you are looking for a safe investment option to save taxes and earn guaranteed returns, you should consider opening a PPF account.

This scheme is very popular long-term savings scheme in India as it combines tax savings, returns, and safety. PPF scheme provides an attractive interest rate and no tax is needed to be paid on the returns which are generated. Currently, this instrument carries interest rate of ~7.1% per annum, while the minimum investment amount is of INR500 and maximum is INR1.5 lakh per annum.

Tenure is of 15 years and it offers guaranteed and risk-free returns. PPF investors can claim tax benefit of upto INR1.5 lakh under Section 80C. The minimum tenure of 15 years is allowed to be extended in blocks of 5 years.

To be eligible for opening PPF account, investors are required to be Indian citizens. Investors can only open one PPF account unless second PPF account is that of a minor. Investments in PPF are not allowed if you are an NRI or HUF.

Features of PPF account

PPF account can be opened with only INR100 per month. Annual investments of more than INR1.5 lakh will not earn interest and will not qualify for tax savings. Deposits into a PPF account are allowed to be made either through cash, cheque, demand draft (DD) or through online fund transfer. Nominee can be designated in this account either at the time of opening or subsequently. PPF account is not allowed to be opened in joint names. It can only be held in the name of one individual.

Since PPF is entirely supported by Indian government, it tends to offer guaranteed and risk-free returns. Apart from this, this instrument provides complete capital protection. As a result, the risk element in holding a PPF account is minimal. Since returns from such accounts are fixed, they can be used as diversification tool for the portfolio. PPF amount can be withdrawn partially after 7th financial year.

Working of PPF account

PPF account can be opened by an adult for self or on behalf of minor. Since there is a lock-in period of 15 years, it is very important that investors invest according to their desired investment horizon. Deposits can be made in lumpsum or in instalments mode. No restriction has been placed on the number of instalments per financial year.

Loan facility is also available on PPF balance. PPF investors are allowed to make partial and premature withdrawals subject to some conditions. Once the tenure is completed, investors can choose to extend the time period with or without making any additional contributions. However, investors can also close the account.

This account can be opened with either post office or with any nationalised bank such as SBI, or Punjab National Bank, etc. Nowadays, even certain private banks such as ICICI, HDFC and Axis Bank have been authorized to offer this facility. PPF account matures after the completion of 15 complete financial years from the end of the year in which it was opened. 

Importance of a PPF account

Public provident fund scheme is ideal and apt for individuals who have lower risk appetite. This investment plan is backed up with guaranteed returns to protect financial requirements of the masses in India. Apart from this, invested funds in PPF account are not linked to equity market. 

Investors can undertake public provident fund regime to diversify financial and investment portfolios. Whenever there is a downswing of business cycle, such accounts can offer stable returns on investment annually. 

Since loans can be taken against PPF accounts, it will only be granted if it is taken at any time from the start of 3rd year till end of 6th year from the date of account activation. Maximum tenure of these loans against PPF is 36 months. Around 25% or less of the total amount which is available in PPF account can be claimed for such purposes.

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