Financial Planning - Tax saving Instruments- Public Provident Fund (PPF)

Hi Friends,

Most of us are not aware of tax planning or tend to give a low weightage towards this. I have seen lots of my friends who have messed up with their tax planning and end up giving generous tax to Govt at the end of financial year closing. In the era of single digits hikes, it’s prudent that we save most of the hard earned salary by proper financial planning.

Hence it’s beneficial that you know some good investment horizons to save your hard earn Money. When we talk about tax planning, 1^st option that comes in our mind is PPF. But we hardly know all Good things and technicalities about PPF. Here are some of the things you should know about your trusted tax saving instrument. 

Account Opening

The Public Provident Fund (PPF) is one of the most popular tax-saving schemes, which can be opened in a post office or designated bank branches (SBI/ICICI).

Interest Rate

The interest rate offered on the PPF is no longer fixed, but linked to the market. It is 0.25% above the 10-year government bond yield. This does not mean that the rate will change on a day-to-day basis. It will be announced every year in April, based on the average bond yield in the previous year. For the current financial year, it is 8.7%.

How does the interest accrue?

This is very Important part that you should aware of. The interest on your PPF balance is compounded annually, but the calculation is done every month. The interest is calculated on the lowest balance between the fifth and last day of every month.

For Example, If you have Rs 1000 in your account from 1^st to 5^th day of the month, You ‘ll get the interest on 1000 rs only even if you credit any amount after 5^th to End of month. You will get interest on lowest balance between the fifth and last day of every month.

Hence it’s advisable to credit your PPF account between 1^st and 5^th of every month and If possible make the entire deposit during 1-5^th April of every year to get full year interest.  I know it’s tough to get 1 Lac investment during start of financial year, hence you can deposit every month as well to get maximum benefit. If you can’t invest 1 lac amount at the start of the financial year, you can start the SIP for it and invest  5-10k monthly as per your capacity.

Tax Benefit and Min/Max investment-

It’s and EEE investment, hence your final amount after 15 years is tax free. You are eligible for tax benefit under 80C as per you tax bracket( Max 30%). You can invest maximum amount  of 1 lac only. You have to put in at least Rs 500 in your PPF account in a year. You will be levied a penalty of Rs 50 if you fail to do so.

Prior withdrawal/ Loan

If you need money, you can withdraw after the sixth year, but it cannot exceed 50% of the balance at the end of fourth year, or the immediate preceding year, whichever is lower. You can also withdraw only once in a financial year. You can also take a loan against it, but this cannot exceed 25% of the balance in the preceding year. The loan is charged at 2% till 36 months, and 6% for longer tenures. Till a loan is repaid, you can't take more loans.

Maturity-

It matures after 15 Years, but you can extend the tenure in blocks of five years after maturity and continue to get the normal rate of interest.

What are the nomination rules?

Don’t forget to nominate someone. Nomination is available in the name of one or more persons. Nominee cannot continue account of the deceased subscriber in his/ her own name.

Sample Investment and Returns-

Investment – 1 lacs/year ( on 1^st April )

Current Rate- 8.7%

Duration- 15 Years

Returns- You will get approx 31 Lacs after 15 years of your investment that too tax free.

An IRR return of approx 13% for the highest tax bracket person. 

Happy Investing.. :)