What is Public Provident Fund (PPF)
What is Public Provident Fund - PPF
The extension of PPF is Public Provident Fund, which is a popular long-term savings and investment scheme offered by the Government of India. It is a tax-saving investment option that offers a fixed rate of interest, compounded annually.
The PPF scheme in India was introduced in 1968 with the objective of mobilizing small savings among individuals and promoting a savings culture in the country. The scheme is open to all residents of India and offers attractive benefits such as tax exemptions, a fixed interest rate, and a long-term investment horizon.
Under the PPF scheme in India, individuals can invest up to a maximum of Rs. 1.5 lakh per annum and the investment is eligible for tax deductions under Section 80C of the Income Tax Act. The maturity period of the scheme is 15 years, which can be extended by an additional 5 years. The interest rate on PPF is set by the government and is subject to periodic revisions. As of March 2023, the interest rate on PPF in India is 7.1% per annum.
Benefits of PPF
Tax benefits: PPF investments are eligible for tax deductions under Section 80C of the Income Tax Act, up to a maximum of Rs. 1.5 lakhs per annum. The interest earned and the maturity proceeds are also tax-free
Long-term investment: PPF has a lock-in period of 15 years, which encourages long-term savings habits. This makes it an ideal investment for individuals looking to build a corpus for their retirement, children’s education, or other long-term financial goals.
Guaranteed returns: The PPF interest rate is fixed by the government and is reviewed every quarter. The current interest rate (as of March 2023) is 7.1%, which is higher than most other fixed-income savings schemes.
Flexible investment options: Investors can choose to make contributions to their PPF account in lump-sums or in installments (up to 12 installments in a financial year). The minimum investment amount is Rs. 500 per year.
Low-risk investment: PPF is a low-risk investment option as it is backed by the government. The invested amount and the interest earned are guaranteed by the government, which makes it a safe investment option.
Loan and withdrawal facilities: Investors can take a loan against their PPF account after completing 3 years of investment. Partial withdrawals are also allowed after the 7th year of investment, subject to certain conditions.
Calculation of PPF
The Public Provident Fund (PPF) is a popular long-term savings scheme backed by the Government of India. The interest rate on PPF is set by the government every quarter and is currently (as of March 2023) 7.1% per annum. The interest on PPF is calculated on the minimum balance between the 5th and last day of each month
Let’s take an example to understand how the PPF interest calculation works:
Suppose Mr. Varun opens a PPF account on April 1, 2022, and deposits Rs. 1,50,000 in the account on the same day. He decides to make an additional deposit of Rs. 5,000 every month. The interest rate for the first quarter (April-June 2022) is 7.1%.
Here’s how the PPF interest calculation for the first year would work:
On April 5, 2022, the minimum balance in Mr. Varun’s account is Rs. 1,50,000 (the initial deposit), and the interest for the month of April is calculated on this amount.
Interest for April 2022 = (1,50,000 * 7.1%)/12 = Rs. 886.25
On May 5, 2022, the minimum balance in Mr. Varun’s account is Rs. 1,55,000 (the initial deposit plus the first monthly deposit), and the interest for the month of May is calculated on this amount.
Interest for May 2022 = (1,55,000 * 7.1%)/12 = Rs. 915.38
On June 5, 2022, the minimum balance in Mr. Varun’s account is Rs. 1,60,000 (the initial deposit plus the first two monthly deposits), and the interest for the month of June is calculated on this amount.
Interest for June 2022 = (1,60,000 * 7.1%)/12 = Rs. 944.50
On July 5, 2022, the minimum balance in Mr. Varun’s account is Rs. 1,65,000 (the initial deposit plus the first three monthly deposits), and the interest for the month of July is calculated on this amount.
Interest for July 2022 = (1,65,000 * 7.1%)/12 = Rs. 973.63
This process continues every month until the end of the financial year (March 31, 2023). The interest for each month is calculated on the minimum balance between the 5th and last day of the month, and is credited to the PPF account at the end of the financial year.