PPF investment: There are a number of benefits to keeping funds in a PPF account for investors.
Many PPF account holders are unhappy as the Government has not increased the interest rate for the April-June quarter of FY 2023-24. The interest rate on PPF deposits will remain the same at 7.1% even though rates for all other small savings schemes have been increased by up to 10-70 basis points (BPS). This is the 12th consecutive quarter where the PPF interest rate has remained unchanged.
Despite the unchanged interest rate, PPF remains a popular investment option among investors. There are various reasons why investors should continue to invest in PPF. Firstly, it is a safe investment option as it is backed by the Government of India. Secondly, PPF has a long tenure of 15 years, which encourages long-term saving habits. Additionally, PPF offers tax benefits under Section 80C of the Income Tax Act, 1961. The interest earned on PPF deposits is also tax-free, making it an attractive investment option.
Another advantage of PPF is that it has a low minimum investment amount of Rs. 500 per annum. Investors can also choose to invest up to Rs. 1.5 lakh per annum. The interest rate on PPF is reviewed by the Government on a quarterly basis, making it a dynamic investment option. In comparison to fixed deposits, PPF has a higher interest rate and provides better returns over the long-term.
5 Reasons are as follows:
tax advantage
One of the main reasons why investors should continue to invest in Public Provident Fund (PPF) is the significant tax benefits it offers. Although the interest rate of 7.1% may seem low compared to other schemes such as NSC, KVP, Post Office Time Deposit, or even some fixed deposit schemes offered by banks, the tax benefits of PPF make it a more attractive savings option.
The PPF account falls under the “E-E-E” category, which means that deposits up to Rs 1.5 lakh per year, interest earned, and the maturity amount are all exempt from taxes. This tax exemption makes PPF a highly tax-efficient savings option.
Furthermore, for individuals in the 31.2% tax bracket, the effective PPF interest rate works out to be 10.32%, which is significantly higher than the advertised interest rate. Therefore, PPF can be a highly profitable investment option for those looking for long-term tax-efficient savings.
Ideal for Long-term Financial Goals
One of the major advantages of PPF is that it allows investors to park their funds for an extended period, making it an excellent choice for those with long-term financial goals. Investors can continue to invest in PPF for 15 years or even more and reap its benefits. Despite its modest interest rate of 7.1%, a simple calculation shows that investing Rs 1.5 lakh annually in PPF can accumulate a tax-free corpus of over Rs 40 lakhs in 15 years and more than Rs 66 lakhs in 20 years.
Guaranteed Returns with Sovereign Backing
PPF provides investors with guaranteed returns, which is a rare feature in today’s volatile market. The government backs PPF, making it a sovereign-backed investment scheme. The PPF interest rate is revised periodically by the government, and the returns are guaranteed, making it a low-risk investment option.
Loan facility
Apart from the tax benefit and guaranteed returns, another advantage of investing in PPF is the loan facility it offers. Account holders can avail a loan of up to 25% against the balance in their PPF account after completing one year from the end of the financial year in which the initial subscription was made. What’s more, if the loan amount is repaid within 36 months, only a nominal interest rate of 1% per annum is charged.
Potential for future increase in PPF interest rate
Although the PPF interest rate has remained unchanged for the last 12 quarters, there is a possibility that it may increase in the future. As the Government revises small savings rates every quarter, there is a chance that the PPF interest rate may go up from its current rate of 7.1%. In the past, the scheme has offered an average interest rate of around 8%, which is higher than the current rate. Therefore, investing in PPF for the long term may be a wise decision for individuals looking for stable returns and potential growth of their investment.