32-year old Sandhya was spending a long-overdue weekend break, after a hectic 2-weeks at office. She was leisurely checking her WhatsApp and Facebook messages, when suddenly a notification alert from her bank, grabbed her attention. It read something like: “Enjoy life after retirement with PPF. Visit the app to open an account today!”
For a second Sandhya thought of ignoring it, but it struck her, retirement age is slowly creeping up. She, just like youngsters her age, preferred new investment avenues like mutual funds. In fact, she already had a few in her account. Sandhya thought “Maybe it is a good time to explore traditional investments.” Let’s help Sandhya understand what PPF account or scheme is, whether there are tax-benefits and how it performs versus other traditional instruments.
What is PPF Account?
A PPF or Public Provident Fund, is essentially a small-savings investment. It helps you save for retirement and avail tax-benefits. Moreover, you can get good and steady returns from the interest accumulated on the account as well. Thanks to the digital age, beginning this type of investment is now quick and easy.
How to Open PPF Account?
To open a PPF account, you’ll need these documents for KYC compliance.:
• Identity Proof
• Address Proof
• Signature Proof
Traditionally, you would have had to visit a post-office or public-sector bank. Now, some private banks also offer a Public Provident Fund account facility. Moreover, your bank’s mobile-banking app may also feature an option to open this type of account.
Account Type:This type of account can be opened only by individuals and not as a joint account. Any Indian citizen can opt for investing in this scheme.
Minimum Tenure or Lock-In Period: Since this scheme is aimed at retirement savings, the minimum investment holding period is 15 years.
Investment Limit and Interval: You begin investing in this scheme with as low as ₹500, with a maximum of ₹1.5 lakh, in each financial year. The deposit frequency or investment interval is, once a year for 15 years.
Nomination: A nominee can be added at the time of opening this account or even afterward.
Interest Rate: The current rate of interest on this account (from December 2018), is 8%. It is compounded annually and is calculated on the lowest balance between the end of the fifth day and the last day of each month.
Associated Risk: There is very low-risk in holding this type of investment. This scheme is backed by the Indian government, which means, your capital and interest are protected. Moreover, returns are guaranteed because interest is certainly going to be added to the principle investment.
Public Provident Fund V/s Traditional Investments:
After going through the features of a Public Provident Fund, Sandhya was wondering about how it would compare with other traditional investments like Fixed Deposits or NSC. Here’s what she discovered:
Interest Rates: The interest rates for this scheme, and others in the same asset class is between 7% to 10%.
Lock-In Period: This type of account requires a minimum lock-in period of 15 years. This is comparatively higher than a Fixed Deposit or NSC (both have an at least 5-year lock-in).
Tax Benefit: Sandhya found out that interest accrued on a NSC is taxable, whereas she could claim income tax benefit for a PPF. This type of account falls under the E-E-E (Exempt-Exempt-Exempt) category of income tax benefits. So, if Sandhya opens an account, she can avail tax benefits u/s 80C. Moreover, she can get exemptions on interest income if she wants to withdraw after the lock-in period ends.
Risk Factor: Sandhya recalled reading that investing in this account has minimal risk. But how would it have an advantage over other options. That’s when she remembered that in this scheme, the principle and interest is safe for the entire tenure. Which meant, her investment would not be affected by unpredictable market movements or economic cycles.
After weighing her options, Sandhya decided, having a PPF account will be extremely beneficial for her. She can save and plan for retirement without having to worry about market risks. Moreover, she can also make the most of her 80C exemption limit. Her next question was, how to open PPF account online? The answer was right in front of her! Since she had received a notification from her bank, she could either open the account by logging in to internet-banking or through the mobile-banking app.
Now that we’ve helped Sandhya to make a prudent decision to plan for retirement, more and more people should consider this as an investment option.