One of the most significant financial targets of a smart investor is to save for his or her retirement. And considering the same you must make reasonable and smart financial decisions during your working years in order to accumulate sufficient funds to live a stress-free retirement life. Among the most crucial facets of putting your assets in line to make the most of your retirement days is retirement planning. And investment for retirement planning is no doubt a long-term investment. Hence, when it comes to long-term investment with assured returns the only tax-saving bet that comes to mind for retirement planning is Public Provident Fund (PPF). But what makes me to consider only PPF here among other tax-saving investments here, let's check out.
Exempt Exempt Exempt (EEE) Status
The Public Provident Fund provides an exempt-exempt-exempt (EEE) tax benefit, which ensures that interest gained, investment and withdrawal are completely tax-free. When it comes to bank deposits, the interest received is taxable. As a result, if you are in the highest tax bracket, you are likely to pay a significant amount of tax. PPF delivers other tax advantages under Section 80C of the Income Tax Act, in addition to tax-free interest income. This implies that an annual investment of Rs 1.5 lakhs applies for tax advantages. The PPF's only drawback is that it has a 15-year term, making it a long-term investment.
Higher interest rates among other tax-saving investments
The Employees' Provident Fund (EPF) presently has the highest interest rate among government-backed fixed income schemes which is capped at 8.5% for the financial year 2020-21. Interest received/accrued from an employee's provident fund (EPF) is tax-free under current tax laws. Interest earned on EPF contributions (only employee contributions) above Rs 2.5 lakh per year is now arranged to be taxed. The PPF, on the other side, is a type of investment in which even self-employed individuals can participate. The existing PPF interest rate is 7.1 percent (for the quarter ending March 31, 2021), which is much better than small savings schemes such as the National Savings Certificate with an interest rate of 6.8%, 5-Year Post Office Time Deposit with an interest rate between 5.5% to 6.7% and 5-Year Tax-Saving FDs of leading banks such as SBI, Axis, HDFC, ICICI which is now fixed at between 5.35% to 5.5%. Compared to fixed deposits of banks, where the interest rate is fixed for the period of the investment, the PPF interest rate is floating and will alter every quarter by the government. From the 5th to the last day of each month, interest on PPF is paid on the lowest balance in the account. As a result, it's essential that you contribute to your PPF on or before 5th of each and every month.
Annual compounding power
PPF interest is compounded yearly, which means that the interest earned on your previous year's PPF corpus will be added to your principal amount, thus enabling you to earn interest in the current year. If you invest Rs 1 lakh per year in a PPF, for instance, you would generate a corpus of about Rs 27.12 lakh in 15 years if the interest rate stays at 7.1 percent. If you extend it for another 5 years, the total amount becomes around Rs 44.38 lakh. A PPF account has a 15-year maturity period. You can either withdraw the entire amount and close the account when it reaches maturity, or you can extend your PPF account for another five years with or without additional contributions. In an extended account with contributions, one withdrawal is allowed per fiscal year, up to a cap of 60% of the balance credit upon maturity in a 5-year block.
A smart tax-saving bet for risk-averse investors
PPF is one of the better alternatives if you are a risk-averse investor seeking for tax-savings as well as a guaranteed return and the stability of your holding. Since many leading banks are currently offering low-interest rates on 5-year tax-saving FDs, the interest rate provided on PPF emerges with a strong rate and is also backed by the government, enhancing its level of safety. This makes PPF a smart bet for aggressive investors who consider diversifying their portfolio by keeping some of their holding in debt instruments. But on the hand, while the Deposit Insurance and Credit Guarantee Corporation limits the amount of money you can invest in a bank FD to Rs 5 lakh, the interest you earn on your FDs is not tax-free.
Partial withdrawal and loan option
PPF also offers loan and partial withdrawal advantages, which would help you meet some of your emergency needs. Between the third and sixth financial years after opening a PPF account, account holders can apply for a loan. The highest loan amount from a PPF account is 25% of the overall amount accrued in his PPF account by the end of the second financial year preceding the year in which the loan is requested. If the loan is repaid within 36 months of the date it was taken, a 1% annual interest rate would apply. If the loan is reimbursed after 36 months, the interest rate would be 6% per year from the date of disbursement. The PPF account also comes with a tax-free partial withdrawal option towards the end of the sixth financial year or the beginning of the seventh financial year. The upper limit for partial withdrawal is limited to 50% of the balance at the end of the fourth fiscal year preceding the year in which the withdrawal is made, or 50% of the account balance at the end of the previous fiscal year, whichever is lower.
Should you invest in PPF?
One of the most popular investment options for building a long-term retirement fund is the Public Provident Fund (PPF). Minimal risk, assured returns, and additional tax benefits are just a few of the important considerations that make PPF an appealing investment choice. Though PPF offers a higher rate of guaranteed returns than bank fixed deposits (FDs) at 7.1 percent, the additional tax advantages provided by PPF, pertaining to a deposit cap of Rs 1.5 lakh, make it appear to be a good bet than other types of investments. PPF deposits are also government-guaranteed, making them safer than other financial instruments such as FDs, ELSS and NPS. When it comes to investing in a PPF, it all relates to the investor's risk tolerance and the investment period. PPF was designed with the goal of ensuring a robust retirement corpus for the investor so that he can live comfortably in his later years. It is extremely beneficial for someone who is completely averse to risk and has a long-term investment goal. Moreover, since PPF has a long maturity period, it may present difficulties in terms of short-term liquidity. That being said, the government has made it possible to close a PPF account early in the event of an emergency or for educational purposes. Furthermore, the 1.5 lakh investment cap appears to be a significant stumbling block for a wealthy player. As a result, an investor who is ready to welcome moderate risk in exchange for respectable returns, no limit on investment there are a variety of investment options available, including ELSS, NPS, mutual funds, and so on. In the context of short-term liquidity considerations in the event of an emergency, ELSS may be a good bet. ELSS funds have historically outperformed PPF funds in terms of returns. However, since it is an equity fund, the investments are vulnerable to market risk. By summing up, PPF is better tailored for a long-term investor who is risk-averse by his or her personal finance attitude and favours the safety and wellbeing of his or her investments over returns.