When it comes to tax saving investment products, one option is on everyone’s face. That is Public Provident Fund i.e. PPF. There are many reasons why PPF is so popular. Come, let’s know about 7 such reasons here.
1. Triple Tax Examination Status
PPF is one of the few investment products that get triple tax exemption benefits. This means that at the time of investment, you get tax rebate on the interest and withdrawals collected. A person can invest up to a maximum of 1.5 lakh rupees in PPF in a financial year. Tax is exempt on the interest earned from the investment. The amount withdrawn at maturity is also not covered by tax.
2. One of the most interest paying options among fixed income producers
Among all the fixed income producers, the highest interest is now on the Employees’ Provident Fund (EPF). The interest on EPF is 8.5% for the financial year 2020-21. However, this investment option is limited to employed people. At the same time, anyone can invest in PPF. The rate of interest on PPF is now 7.1 per cent (for the quarter ended 31 March 2021). This is more than other small savings schemes. The interest rate of PPF has not been much lower than the rate of EPF.
3. Advantage of floating rate
For a long period, when you fix your investment at a lower rate of interest, there is a loss when the rate increases. This is one of the major reasons that makes PPF more profitable than 5-year tax saving fixed deposits. In fixed deposits, the rate of interest remains the same during the entire investment period. At the same time, the interest rate on PPF varies. It changes every quarter. When there is an environment of increasing interest rate in the economy, PPF rates also increase and you benefit. However, the floating rate is like a double-edged sword. You have to bear the loss as rates fall.
4. Long-term compound interest looks amazing
If you have time, then compounding interest in the long term can do wonders for your investment. PPF account matures in 15 years. On account maturity, if you wish, withdraw the entire amount or keep it running in a block of five years. If you invest Rs 50,000 every year in PPF, then in 15 years you will raise an amount of Rs 14.06 lakh. The rate of interest here is assumed to be 7.1. If you extend it further for 5 years after maturity, then the amount will increase to Rs 22.69 lakh. With such 3 extensions, you will add 50 lakh rupees in 30 years.
PPF can invest a maximum of 1.5 lakh rupees in a single financial year. You will raise 42.18 lakh rupees in 15 years by investing this amount. With 3 extensions, this amount will be Rs 1.56 crore in 30 years.
5. Tax haven for Conservative Investor
PPF is one of the best options if you want to invest for tax savings with assured returns and investment protection. Right now most of the big banks are giving 5.5% or even less on 5 years fixed deposits. At the same time, the PPF interest rates are definitely much higher. Returns from FD are covered under tax.
6. Aggressive investors can also diversify through PPF
Even investors with high risk appetite can put some part of their investment in debt products. This is good for diversifying the portfolio. If the investment is long term then PPF is a good option for such aggressive investors. This gives sufficient stability to the debted portion of the portfolio. Also, returns are good.
7. Those in the higher income tax bracket must adopt
For most investors in the higher income tax bracket, section 80C may not be so relevant. They can have various options like EPF, Children’s Fee, Home Loan Principal, Term Insurance Premium etc. However, tax exemption on returns makes PPF attractive. Especially when tax is levied on an income of 30 percent or more.
