The tradition of new investments and wealth creation in Indian families on the auspicious occasion of festivals is centuries old. Especially during Diwali and Dhanteras, people not only buy gold and silver, but also give priority to investing capital in long-term plans to secure the financial future of themselves and their family. Despite many modern options available in the market like stock market and mutual funds, a large section of the country still trusts those financial instruments where the risk is zero and the returns are completely guaranteed by the government. Among such safe options, bank fixed deposits (FD) and post office small savings schemes remain at the forefront. 'Public Provident Fund' i.e. PPF, supported by the Central Government, is one such instrument which not only provides complete security of capital to the investors, but also gives an opportunity to create a huge fund in the long run through the power of compounding.
The Public Provident Fund Scheme operates under the Finance Ministry of the Central Government. The primary objective of this scheme is to encourage the habit of regular savings among common citizens, salaried class and self-employed people. The government determines the interest rates of all small savings schemes, including PPF, every quarter after reviewing the country's economic conditions and bond yields. At present, interest at the rate of 7.1 percent per annum is being given on this scheme. This rate is also considered very attractive for risk-averse and middle class investors because there is a Sovereign Guarantee of the Government of India on the principal amount deposited in it and the entire interest received on it, due to which the risk of any kind of default is completely eliminated.
The most prominent feature of the PPF account is its mandatory lock-in period of 15 years. This plan is considered best suited for meeting long-term financial goals such as children's higher education, their marriage or creating a corpus after retirement. If an investor wishes to continue his account even after completion of the maturity period of 15 years, it can be extended further in a block of 5 years as per the rules. Under the rules of the scheme, a minimum amount of ₹ 500 and maximum of ₹ 1.50 lakh can be deposited in any one financial year.
Now if an investor pledges to invest ₹1 lakh every year with discipline this festive season, his total investment during 15 years will be ₹15,00,000 (Rs fifteen lakh). Based on the current compound interest rate of 7.1 percent, the total maturity fund to be received after 15 years will be approximately ₹ 27,12,139 (Rs twenty seven lakh twelve thousand one hundred thirty nine). Of this total maturity amount, ₹15,00,000 will be the investor's original investment, while the remaining ₹12,12,139 will only be the profit earned in the form of interest. This figure makes it clear that through regular and disciplined investment, approximately 80 percent more than the principal amount can be earned only in the form of interest.
While investing in PPF, it is not enough to just deposit the money, but choosing the right time to invest is also very important. As per the rules, interest in the PPF account is calculated on the basis of the lowest balance between the 5th of every month and the last day of the month. Thus, if a person deposits money after the 5th of the month, he does not get any interest on that deposit for the entire month and that benefit gets added to the next month. Therefore, investors who deposit installments every month are always advised to transfer the amount between 1st and 5th of the month.
If an investor wants to invest a lump sum of ₹ 1 lakh annually, then it proves to be most beneficial for him to deposit the entire amount at the beginning of the financial year i.e. between April 1 and 5. By doing this, you get full compound interest on that entire ₹1 lakh for 12 months. At the end of the financial year, i.e. on 31st March, this earned interest is added to the account and further interest starts earning on this interest in the next financial year. This is the real magic of compound interest which transforms small contributions into huge capital in a journey of 15 years.
The strongest aspect of Public Provident Fund is its unique tax structure. Under Indian income tax laws, PPF has 'Exempt, Exempt, Exempt' i.e. Triple E (EEE) category status. This simply means that in this scheme the investor gets complete exemption from income tax at all three major levels. First, tax deduction under the old tax regime can be availed under Section 80C of the Income Tax Act 1961 on an amount deposited in PPF annually up to a maximum of ₹1.50 lakh.
The second biggest advantage is that the interest credited to the account at the end of every financial year is completely tax-free. Unlike bank fixed deposits (FD), where TDS is deducted on the interest earned and is considered taxable as per the income slab of the investor, the government does not levy any tax on PPF interest. The third and final stage is that of maturity; When an investor withdraws his entire accumulated fund after completion of 15 years, then there is zero tax on that entire withdrawal amount. Since there is no Capital Gains Tax, the net return of 7.1 percent on PPF proves to be more effective than many other investment options in post-tax calculations.