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The best way to make PPF work for you
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May 06, 2005

It is no coincidence that the Public Provident Fund is one of the most popular investments in the country.

The safety and an 8% compounded annual return is bound to attract investors.

And, due to the tax benefit because PPF falls under Section 80C, your actual return of 8% works out higher.

As you are probably aware, all investments under Section 80C are eligible for an income deduction. So if your taxable income is Rs 100,000 and you invest Rs 40,000 in PPF, your taxable income falls to Rs 60,000.

PPF makes for a safe investment as well as a tax-saving avenue.

How compounding works to your benefit

Let's say you invest Rs 24,000 in the PPF. Which means you will have to save around Rs 2,000 every month towards this kitty.

Now let's assume that, every year, you save the same amount, Rs 24,000.

Over 15 years (the tenure of the investment), at 8% per annum, your kitty would be worth Rs 7,79,914.85.

Think about it! Every month you put aside only Rs 2,000. Years down the road, you end up with more than Rs 7.5 lakh.

If you want to know how you can access this money during these 15 years, read 5 common questions on PPF.

Where you might lose out

The above calculation was made with 8% per annum.

You might have got more if you had started the account years ago. This is because the interest rate on PPF has gradually been lowered over the years.

It was initially 12% per annum. It dropped to 11%, then 9.5% and is now 8%. This rate of interest is fixed (and changed) by the government.

Who knows? In the future it may drop further and then you would land up with less than what is calculated above.

Also, if the amount is to be taxed on maturity (see PPF could be taxed on withdrawal), you will get less in hand.

What are the limits for investing under PPF?

You can invest upto a maximum of Rs 70,000 per annum in the PPF. The minimum you must put in every year is Rs 500.

Besides having such a huge leeway in terms of the amount of money to be invested, you can invest the money in upto 12 instalments. You don't have to put it all in one go.

Each instalment can be whatever amount you want it to be in multiples of Rs 100 (though not less than Rs 500). They need not all be identical.

How to make it work to your benefit

Interest is calculated on the lowest balance between the fifth and the last day of the month of March.

Let's say you have Rs 100,000 in your PPF account. On the 10th, you deposit an additional Rs 10,000. Your interest will be calculated on Rs 100,000 (not Rs 110,000).

So make all your deposits before March 5. But don't do so way in advance.

Put your money in a bank fixed deposit that matures by February. On maturity, put it in the PPF account. This way, your money works harder for you.

Can I open more than one account?

Yes you can. In fact, it is the ideal solution if you are saving for a number of goals.

Say you want to save for your child and your retirement. Then open two accounts, one for yourself and one for your child.

But this does not mean the tax benefit is doubled.

The contributions made by a parent to the PPF in the name of the child are eligible for deduction u/s Section 80C. To understand the section, read PPF could be taxed on withdrawal.

Incidentally, your child could be a major or minor, married or unmarried, male or female, dependent or not, adopted or otherwise. No restrictions on this front.  

The restriction is, the total contribution to the parents and child's accounts should be, at most, Rs 70,000.

Should you die before the account matures, your nominee has the option of closing the account or continuing with it till maturity. But fresh contributions will not be permitted.

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