PPF is a Good Investment

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On March 3, the Ministry of Finance announced a hike, of up to 0.2 per cent, in interest rates on fixed- deposit schemes offered by post offices. The decision to hike the rates was in line with the recommendations of the Shyamala Gopinath Committee in order to render small- savings schemes more attractive, and for returns to fall in line with those of government securities (of similar maturities). The interest rate on the popular PPF, however, was held unchanged, at 8.7 per cent per annum compounding annually.

The Public Provident Fund (PPF) still proves to be a winner when compared with any of its peers. Here's how.

At present, PPF is one of only three exempt- exempt- exempt (EEE) investment schemes available in India. The other two are the Employees' Provident Fund (EPF) and Equity- Linked Savings Schemes (ELSS). While the last carries market risks, the other two are government- backed fixed- income schemes, where the rate of interest is determined every year by the government.

The EPF is offered to those employed in an organisation and comes with the employer's share in (contribution to) an employee's account. As an individual, you are eligible to open a PPF account.

Tax liability

What does EEE mean? It means your contribution to the scheme ( subject to a limit of ₹ 1 lakh a financial year) is exempt of tax, even as it earns interest throughout its term, as well as exempt of tax when withdrawn on maturity ( including the interest earned). And the accumulated balance over time in a PPF account is exempt even from wealth tax.

Holding period

A PPF account has a lock- in of 15 years, extendable, as often as one wishes, by a block of five years. The extension period can be with or without contribution to the account.

Rate of interest

PPF is available at post offices and banks. The minimum amount to be deposited every year to keep a PPF account active is ₹ 500. The rate of interest is fixed every fiscal and benchmarked against the yield of Central government securities of comparable tenures. The rate of interest at present is 8.7 per cent p. a., compounding annually. Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month.

Contribution to PPF every year

The maximum amount which can be deposited in a PPF account every year is ₹ 1 lakh. The interest earned on the PPF subscription is compounded annually. If the minimum account holder. Though the lock- in period is 15 years, investors are allowed premature withdrawals and are even granted the facility of a loan, subject to the prescriptions of the PPF Scheme.

Here is how PPF scores over other investments

PPF v/ s a fixed deposit

With a similar investment pattern and an interest rate of 9 per cent p. a., is PPF better than a bank fixed

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