Interest rates have fallen a great deal in the last 1-2 years and it is extremely difficult to find investments that give decent returns. The Public Provident Fund is one of the oldest schemes and there are many reasons to be investing in the same. Here are 4 reasons why the PPF should become a part of every portfolio.
1. High interest rates
The interest rate on the PPF is currently 7.1 per cent. If you compare this with the interest rates on Fds of banks like State Bank of India or larger private sector players like ICICI Bank and HDFC Bank, you realize that they give a maximum interest rate of around 6 per cent.
This makes the interest rates on the Public Provident Fund a good 1 per cent over and above the interest rates offered by some of the larger banks.
The maximum amount of investment through the PPF is Rs 1.5 lakhs every year, while the minimum investment is Rs 500 each year.
2. Interest income is tax free of PPF
It is important to remember that interest earned on the Public Provident Fund is tax free in the hands of investors. If you consider bank deposits, the interest earned from them are taxable. So, if you are in the highest tax bracket, you tend to lose a lot. In fact, your post tax yields will fall dramatically in other instruments, which makes the PPF a good choice.
The Public Provident Fund offers nomination facility and it can be transferred from one post oofice to the other.
The one disadvantage of the PPF is that if you are looking at electronic means of en cashing or using technology, you may have a problem.
3. Tax benefits under Sec80C
Apart from the interest income being tax free in the hands of investors, there are also tax benefits under SEC 80C. This means a sum of Rs 1.5 lakhs invested every year, qualifies for tax benefits.
There are many such instruments that offer the same tax benefits and the Public Provident Fund is one them.
The one disadvantage of the PPF is that it has a 15-year tenure and hence is long term in nature. However, you can withdraw the amount after 5 years, but, there would be an interest of 1 per cent that would be deducted from the date of opening.
The PPF is a small savings scheme, which is backed by the Government, hence the safety is extremely high in the PPF. We have seen in the past, that even banks have had problems in paying back deposits on demand. Therefore, an investment should have a high amount of safety. The PPF is an extremely safe investment.
About the author
Sunil Fernandes has spent 25 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. His forte remains stocks, mutual funds and tax planning.