What are Public Provident Funds (PPF)?
Everyone wishes for a peaceful retirement. You have worked hard throughout your life, all you want to do now is probably travel to places, watch your grandchildren play, get together with old buddies or simply spend time gardening for which you couldn’t spare time during your employment years. But to do all of this, it’s important that you are financially secure and independent. To achieve your goal, you have to start early.
“Never too late to start. Anything can happen anytime.”
The words of Avery Neumark (CPA and Partner in Tax Group at Marks Paneth LLP), is very true, the future is a treasure box of unseen mysteries. Old age can also be unpleasant due to uncertain events like health issues or unexpected emergencies. You want to be prepared for that. Right? Hence, it’s vital that you back your retirement age with assured income to meet all your needs, both planned and unplanned. There are various schemes that help you create a good corpus to keep you prepared for your golden days to come. One such scheme is our topic for discussion today – “Public Provident Fund”
Let me explain about Public Provident Fund (PPF) with the help of “5 Ws”.
What is PPF?
On July 1, 1968, the Central Government of India introduced the voluntary Public Provident Fund that would assure income security for resident Indians (both salaried and self-employed) during their retirement. The PPF rate for January – March 2019 (Q4 FY19) is 8%. However, the Indian Government revises these rates every quarter.
Why should I opt for PPF?
- PPF provides assured returns during your old age, thereby providing financial security.
- PPF is highly reliable and risk-free as it is a Government scheme thus ensuring capital protection.
- Helps you face inflation, provided the inflation rate is below the interest rate provided by PPFs. Additionally, the Government reviews the PPF rates quarterly.
- PPF provides tax benefits – Exempt, Exempt, Exempt (EEE):
- The maturity amount, interest earned and deposits are completely tax-free.
- Also, the sum invested in PPF is eligible for tax deduction under Section 80(C) up to a maximum of 1.5 lakhs.
If EEE is the tax status you are looking for your investments, then why do it for 8 % returns when you can receive the same status for returns between 9-14% or more? Yes, with Finity you can invest in National Pension Scheme (NPS), which was started by the Indian Government under the Pension Fund Regulatory and Development Authority (PFRDA), with the initiative to provide pension opportunity to every Indian and inculcate the habit of saving for retirement. NPS also receives tax exemptions on the deposits made, interest earned and the maturity amount.
Read more on NPS in the blog post: How to plan your retirement with National Pension System (NPS)?
When can I withdraw my funds?
Though PPF has stringent lock-in period and withdrawal protocols, it still provides Liquidity:
- The entire amount can be withdrawn only after the PPF tenure (15- year lock-in + 5-year extension). However, loans are offered against the PPF from the third to the sixth year.
- Premature closure of PPF takes place in the event of the account holder’s death only. However, to support the needs of medical emergencies or cater to child’s higher education, PPF has also proposed early closure after 5 years of its completion.
- To provide cover in cases of financial crises partial withdrawals are permitted. Such withdrawals are allowed once a year, from the 7th year onwards and are subject to conditions such as:
- withdrawals must not exceed 50 percent of the balance at the end of the fourth year, or
- 50 percent of the balance at the end of the immediately preceding year, whichever is lower.
The major objective of a PPF account is to create long term savings because the minimum investment tenure is 15 years. In this case, investing in Mutual Funds makes more sense because you can earn returns more than 15% as opposed to 8% with PPF. Some of the funds that give >15% returns for a 5-year investment are:
- Reliance Focused Equity Fund – Returns > 21.48%
- Franklin India Focused Equity Fund – Returns > 21.07%
- SBI Focused Equity Fund Direct Plan Growth – Returns >19.27%
At the same time, liquidity is also a crucial factor for investment. After all, it is your money and you must be able to access it when there is a need or an emergency. If you have objectives that need a smaller time period, then you can invest your savings in Short Duration Mutual Funds.
Here are some short term funds (between 1- 3 years) that provide returns more the 8%:
- Franklin India Short Term Income Plan – Returns >9.31%
- Baroda Short Term Bond Fund – Returns >8.84%
- SBI Magnum Income Fund Direct Growth – Returns >8.55%
Curious to know Top Funds in other Mutual Fund categories? You can do so by reading: Top Rated Mutual Funds in Different Categories
Who is eligible for a PPF?
You are eligible to open a PPF account if you are a resident of India. And there is no age barrier for enrolling yourself with PPF. This is generally seen as a good option for investors who have a low-risk appetite and are looking for definite returns.
A minor can also hold a PPF account through the guardian.
Where do I open a PPF account?
You can open a PPF account from:
- State Bank of India (SBI) and branches of its associated banks.
- Nationalized banks such as Bank of India, Bank of Maharashtra and Bank of Baroda.
- Head or general post office.
- ICICI Bank, Axis Bank and various such as private sector banks
All you need is:
- Aadhar card or acknowledgment of your Aadhar application, in case of its absence.
- Identity proof: Aadhar card, passport, PAN, driving license, voter’s ID, ration card or Form 60 or 61 as per Income Tax Act 1961.
- Account opening form.
- Two passport size photos.
Or, if your end goal is just to save up for retirement and you don’t like this tedious offline process and cumbersome paperwork, then you can sign up on Finity and complete the paperless KYC in 5 minutes to build your retirement corpus by investing in National Pension Scheme (NPS) or Retirement Funds.
- You can start your PPF account with just Rs. 100/-.
- The minimum deposit is of Rs. 500 and the maximum is Rs. 1,50,000 in a financial year.
- You have the flexibility to make deposits in one go, or through installments made monthly, quarterly, half-yearly or yearly.
- Remember to carry your original identity proof at the time of opening the account for verification purpose.
- Don’t forget to choose a nominee.
It’s necessary to have a fund for your retirement as it is essential to take care of your expenses when you retire and continue to cover the needs of your family or dependents. At the same time, what happens to your family in case of your untimely death? That is also an unseen possibility in the future. Right? To secure your family in such an event, it’s necessary you also consider Term Insurance as an investment option in which the beneficiaries of your term insurance policy will get the guaranteed amount that would help them continue the lifestyle you had provided them financially.
With Finity you will be able to provide a cover of 1 crore to your family by just paying more or less the same amount you require to get your Netflix subscription. All you need is a few minutes to input your personal details, annual income and choose the life cover your family requires.
Why should I consider an alternative for PPF?
Though Public Provident Fund is one of the most trusted instruments to build your retirement corpus, it also has its drawbacks. And to overcome these drawbacks you choose Mutual Funds or NPS as an ideal investment option. Let’s see why:
- The amount that can be invested in a PPF account is limited to Rs. 1.5 lakh per year. But with Mutual Funds and NPS, there is no limit on the amount you can invest.
- PPF offer less liquidity. You cannot withdraw your funds until the completion of 7 years. But with Mutual Funds, you can retrieve your money at any time from most of the investment plans.
Want to read more on Retirement? Check: Retirement Planning
Mutual Funds are best known to provide plans that suit your investment horizon, risk appetite and financial need. To gain access to these tailor-made funds, you can invest in Finity, India’s most trusted app for Direct Plan Mutual Funds. Finity specifically provides funds for your retirement goal. All you need to do is choose the year you would retire, pick your retirement lifestyle and begin investing small amounts every month through SIPs (Systematic Investment Plans). Signup up on Finity now: Invest Now.
So begin your investment with Finity app.
Start today, and reap the benefits in the days to come!