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Public Provident Fund – Slow but steady

Indeed, the cliché is perfectly applicable to investments in the Public Provident Fund (PPF). Read on to decode the details and invest now – if you haven’t already. 

I am going to be 26 for life. Well, I mean, I ‘stopped the clock’ on my 26th birthday. So even though I age, I still retain the optimism I had at 26 when my career graph was rising steadily. My faith in mankind is a bit dented admittedly, but largely intact. Most importantly, even though I no longer have a full-time job, I still enjoy financial freedom. And the reason for my financial freedom is smart investing while I had a large disposable income with minimal liabilities. Among the basket of investments, I did over the years, is one that more than lived up to its promise. This was my Public Provident Fund.

Low contribution and tax benefits

I started my PPF account when I was 26. It was my mother who insisted that I must have a PPF account. When she would talk to me about it, I would generally zone out – an adolescent habit that resurfaced in adulthood whenever topics like marriage and money were brought up. The only things that registered were that I just had to deposit a minimum of ₹ 500 per year. I gave in just to satisfy my mom, but now thank her for pushing me. Not only was my annual contribution to PPF a tax deduction, when I finally withdrew my money on maturity, but the entire amount was also tax-free. The returns are guaranteed by the government. Today, the interest rate is 8 per cent compound – meaning every ₹ 100 will become ₹ 108 and the next year, the interest will be calculated on ₹ 108+ the new contribution, not ₹ 100+ new contribution.

Fifteen is not too long

Don’t be daunted by the long lock-in period. Yes, the contributions have to be made annually for 15 years, but in a lifetime of 80+ years, 15 is not a very significant number. In any case, there are options. After three years and five years you can take a loan from your account to the tune of 25 per cent of the balance at a very low rate of interest and after the seventh year, you can make partial withdrawals for emergencies like medical treatment and higher education for self or child. The scheme is so beneficial that a lot of people even extend it beyond 15 years. You can extend it in blocks of five years. You can even let it continue beyond maturity without making any further contributions and let it earn more interest. 

Get started with ₹ 100

So ready to open your PPF account? You can do it in the post office, any nationalised bank or even some private banks. All you need is ₹100 to open the account. The low opening amount and the flexibility of annual contributions make PPF an ideal savings instrument for anyone who has a variable income. I found it particularly convenient as there was no stress on putting in a large amount every year. I put in whatever I could at the end of the financial year. You can put in as little as ₹500 and as much as ₹1,50,000. Experts say that the best time to put in your contribution is by the 5th of April.

The compound interest is calculated on the lowest balance between the 5th and the end of the month and is credited annually. It may seem like a small amount, but when we are talking compound interest, it does make a difference. The government calculates the interest rate every quarter. From 1986 to 2012, this rate of interest was a whopping 12 per cent but fell to a low of 7 per cent in 2014. It has risen since and today at 8 per cent it is one of the best returns on any government guaranteed scheme. 

₹15 lakh grows to almost double

I was 42 when my PPF account matured and it could not have come at a better time. I was on a work sabbatical and struggling with a toddler and EMIs on a home loan which was extremely stressful as I was dipping into my savings for them. With the lump-sum that I got, I was able to repay my home loan in its entirety and still had some left over which I used to set up a Sukanya Samriddhi account for my daughter. But that is a story for another day. Just to make the maths clear, if you invest ₹ 1,00,000 per year for 15 years, you will end up with ₹ 29,00,000 approximately at the time of maturity – all tax-free.

EEE advantage

While PPF may seem old-fashioned and you may baulk at the idea of going to the post office, remember, you can make your contributions monthly, quarterly or annually in cash, by cheque or online. Diversify your portfolio with equity, debt instruments and schemes like PPF which enjoy the EEE (exempt-exempt-exempt)advantage of tax-deductible contributions and tax-free returns and the tax-free amount at maturity.

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