Public Provident Fund (PPF) is a popular small savings scheme of the Government of India, which investors have long considered as the safest and most reliable investment option. Investment in this scheme is guaranteed by the government, and the interest is completely tax-free. If investors invest by planning at the right time, then the interest income can be increased manifold.
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Special rule of interest calculation
The most important aspect of PPF is its interest calculation. Interest is calculated on the minimum balance present in the account from the 5th of every month till the end of that month. If investors deposit the amount in the account on or before the 5th, then interest will be received on that amount for the whole month. But if the money is deposited after the 5th, then the interest for that month will be calculated only on the minimum balance. Therefore, sensible investors always consider it beneficial to invest before the 5th.
The magic of compounding
The biggest strength of PPF is compounding, i.e., compound interest. The sooner one starts investing, the bigger the corpus will be in the long run. For example, if a person starts a small investment at the age of 20 to 25 years, they can create a much larger fund than a big investor at the age of 40 to 50 years. This is the reason why financial experts advise the youth to start investing in this scheme as soon as possible.
Triple benefit of tax exemption
PPF has been placed in the Triple-E, i.e., Exempt-Exempt-Exempt category. This means that the investor gets tax benefits at three levels. First, investment up to Rs 1.5 lakh in every financial year is tax-deductible under Section 80C of the Income Tax Act. Second, the interest received on it is completely tax-free, and third, no tax is to be paid on the amount received on maturity after 15 years. This is the reason why this scheme is much more attractive than schemes like FD.
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Effect on premature withdrawal
Although the lock-in period of PPF is 15 years, partial withdrawal is allowed after 5 years if needed. Despite this, financial experts advise against premature withdrawal as doing so reduces the effect of compounding and may reduce the total return. Therefore, it is wise to maintain investment for a long period.