Kolkata: PPF or Public Provident Fund is one of the very few instruments that has almost kept its popularity intact surviving the transformation of the economy from a controlled to a market-oriented one. It was launched in 1968 as an instrument for encouraging long-term capital appreciation for the common person for use in the later stages of his/her life. Despite fundamental changes in the economy and the pronounced inclination of the middle class towards equities and equity-linked instruments such as mutual funds, PPF remains an item on the portfolio of millions of Indians. Let’s have a look at the attractions of this instrument.
The features of PPF are well known. One, an interest rate of 7.1%, which is offered by it for well over four years. The Centre didn’t lower the rates on July 1, though it could have easily slashed the rates and especially since the 10-year G Secs to which the rate is pegged has suffered a decline in yields. PPF rates are determined by adding 25 basis points to the average yield of these government securities in the earlier quarter.
Significance of guaranteed-return
It can be said that as interest rates decline in this country, PPF is likely to grow in importance among the people. Another point to note is that debt instruments lend stability to any portfolio and PPF can be a perfect long term way to stable capital appreciation with income tax advantages (if you are in the old tax regime).
Moreover, one can invest in it for the very long term. After the initial 15-year lock in period, one can keep renewing the tenure by blocks of five years. That leads one to earn significant interest rates for decades in a completely safe manner. This instrument enjoys sovereign backing. But here are two remarkable aspects of PPF which are not commonly discussed.
A minor PPF account
Rules allow the opening of a PPF account in the name of a minor. A parent, or legal guardian, can open such an account soon after the birth of a child in his/her name. The rules also allow the contributing parent/guardian to get the income tax benefits that come with the scheme. The net outcome is that if one opens a kid’s account and keeps contributing to it regularly, it is quite possible that the account holder becomes a crorepati even before he/she turns 30, simply by the virtue of this investment in a secure manner without the turbulence of the markets.
You can use it like a pension account
A PPF account can actually be used like a pension account. According to the rules, after the initial lock-in period expires, one can withdraw money once from the account. If you are in the old tax regime, this withdrawal will be free from income tax too, since PPF is an E-E-E (exempt-exempt-exempt) account. Assume you have Rs 50 lakh in your PPF account. Considering the interest rate to be 7.1% now, the principal will generate Rs 355,000 as interest for a particular financial year. It means, if you withdraw this amount in a year — but it has to be in a single tranche — you will get a significant amount every month, about Rs 30,000. Moreover, the principal will not go down in the PPF account. Thus it can also be viewed as a pension generator.
If one opens a PPF account in the name of a minor and keeps investing rs 10,000 every month, the account will make the kid a crorepati before he/she turns 28.