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How to maximize PPF returns?

A Public Provident Fund or PPF is one of the best ways to save up for the distant future. The fact that it is a government-run scheme with attractive interest rates is also a great motivator in the widespread use of PPF. In addition, it helps in saving taxes.

 

What is a PPF Account?

PPF is a scheme offered by the Government of India to salaried people for saving taxes. The interest rate of the account varies from quarter to quarter. The interest that is paid by the Government is actually dependent on government bond yields. Historically, the interest rate hovers around the 8% mark.

The rate of interest is announced by the Government of India every quarter. Individuals who are residents of the country are eligible to open this account. This means that Non-Resident Indians cannot open a PPF account. Although, if a resident Indian who has a PPF account moves abroad and becomes an NRI, he/she can continue operating the account till it matures.

Restrictions on opening a PPF account:

  • You cannot open joint accounts
  • One person can open only one account
  • Parents can open a PPF account on behalf of their kids

A PPF account can be opened with any bank – nationalized or private – and also at the post office. A PPF Account is valid for a period of 15 years from the date of opening.

Why should I open a PPF Account?

The best thing is that PPF is part of a Government-owned scheme. This means that your investment or saving is safe and has minimal risks. It is one of the most popular ways to save tax – in fact, you can deposit and save up to INR 1.5 lakh every year in the account. The interest earned on this amount is also tax-free.

It is important to note that the interest or the return earned on your PPF amount is considerably higher than what you get to earn if you put the same money into a Fixed Deposit (FD) account in a bank. The interest rate is announced by the Government every quarter. As per the Government Savings Banks Act, 1873, PPF Accounts are protected from any court decree or attached under any order.

PPF Account is EEE or an Exempt-Exempt-Exempt Contribution. Any amount up to a maximum sum of INR 1.5 lakh per annum can be deposited and considered for deduction under the Income Tax Act, Section 80C. Maturity proceeds plus the interest accrued on the PPF Amount is exempted from all taxes. However, the returns that you have made on your account needs to be mentioned mandatorily when you are filing for your income tax returns.

Method of calculating interest rate on PPF

The interest is calculated on a monthly basis but is compounded annually. This means two things:

  1. The interest on PPF has been made a variable entity and is not fixed anymore.
  2. The interest is calculated on a monthly basis. Between the 5th of the month to the end of the month, the interest is calculated on the lowest balance in your PPF account.
  3. The interest is compounded annually, which means that the interest is reinvested and summed up with the account holder’s contribution. It is not distributed.
  4. At the end of each financial year, the interest amount gets credited to the PPF account annually.

How to maximize returns or interest on your PPF Account?

  1. To maximize returns, make a monthly deposit into the account before the fifth of every month.

The first and the easiest way to increase returns on your PPF account is to ensure that your monthly contribution to the account goes between 1st and the 5th of the month. How does it help? You need to remember that the interest is calculated on the amount that gets deposited before the fifth of the month. So, if you deposit money into your PPF account after the fifth – that is sixth onwards, then the interest calculation does not take this amount into account for that specific month.

  1. If monthly deposits are not for you, then deposit INR 1.5 lakh at the beginning of the fiscal year.

The financial year for your PPF account is April to March. So, if you wish to maximize the returns by doing a yearly deposit, you need to make the deposit between 1st April to 5th April each year. Once done, you can relax for the entire year as this one-time deposit will keep earning for you throughout the year. The amount that you need to deposit should not be more than INR 1.5 lakh because this is the maximum amount that you are allowed to invest in the PF account on a yearly basis. You need to remember that you can deposit a minimum of INR 500 in your PF account in a year.

  1. Go for banks that offer online transfer option for your PPF account

When you need to go to the bank or the post office on a monthly basis to deposit cash, it can become bothersome. It also can take up too much of your time. Visiting banks or post offices, standing in queues for cash deposit in your PPF Account is not really the smartest option. This way it is quite easy to miss the deposit deadline. Instead, choose a bank that offers online transfer options. Open your PPF Account with a bank that has facilities of Net Banking – IMPS, RTGS or NEFT. This way there are better chances that you will not miss the deadline. Also, you can set reminders or set up the automated monthly-payment mode where the money gets deducted from your account every month without your manual intervention.

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