Is Provident Fund a Good Investment?

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How to open a PPF account? What are the scheme and the interest rate it gives? What does the Exempt-Exempt-Exempt law mean? The article answers all these crucial questions to help you decide if PPF is a worthy financial investment or not for you!

Public Provident Fund (PPF) is one of the most popular tax-saving schemes. Interest earned on deposits in the PPF account is not taxable and deposits made towards PPF accounts can be claimed as tax deductions. This makes the PPF Scheme one of the most tax efficient instruments in India. It was launched to encourage savings among Indians in general, especially to encourage them to create a retirement corpus.

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The Scheme and Interest Rate

People can deposit funds in PPF accounts for a fixed period of time to earn returns on their savings. The PPF interest rate for 2016-17 is 8.1%. Since this scheme was launched to encourage savings across income classes, minimum deposit requirements are very low and affordable. They are also tax-free accounts, easily accessible, safe (being backed by the government) and simple to understand, making them a popular investment avenue for a large majority of individuals in India.

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Opening a PPF Account

PPF accounts can be opened at any nationalised, authorised bank and authorised branches / post offices. PPF accounts can be opened at specific private banks as well. These accounts can be opened by filling out the required forms, submitting the relevant documents and depositing the minimum pay-in at such branches/offices that have been authorised for the same. Interest rates are set and announced by the government of India. Interest is calculated for a financial year according to the rate announced for the said year i.e. unlike bank FDs the rates are not fixed for the entire tenure of the holding. The maximum amount that can be deposited in the account is also subject to change.

Exempt-Exempt-Exempt

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. EEE means your contribution to the scheme (subject to a limit of Rs. 1.5 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.

To put it in summary, PPF is the most excellent tool to save for the future because the interest that is earned on its deposits is not taxable. Moreover, the deposits made into the PPF account over a financial year can be claimed as tax deductions, which reduces your tax liability.

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