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How to Maximise PPF returns accruing to your PPF account

While investments in the stock market are accompanied by trepidations concerning the wild swings in share prices, fixed deposits also entail taxability of interest earned on them. Here, Public Provident Fund (PPF) comes as a relief to the investors seeking the best of them all. PPF investments are preferred by risk-averse investors since such investments are wrapped in safety and are free of tax. They are long-term investments backed by the government authorities.

Small business people and self-employed professionals who do not fall under the ambit of Employees’ Provident Fund find PPF as a saviour to help reap long-term benefits and realize their goals.

The minimum amount of deposit required to be made in a PPF account is Rs. 500, and the maximum limit is Rs. 1,50,000 per year. Earlier, the maximum amount which could be invested in PPF in a given financial year was restricted to Rs. 1,00,000; however, the limit was enhanced to Rs. 1,50,000 from the financial year 2014-15 onwards.

PPF account scheme comes under the EEE (Exempt, Exempt, Exempt) tax bracket. This means that:

• Sums contributed to PPF schemes are eligible for tax deductions under Section 80C.
• Interest earned on PPF schemes is fully exempt from tax.
• Withdrawals made from the scheme whether at maturity of the lock-in-period or pre-mature withdrawals are not subjected to tax.

Features of PPF

Although the PPF scheme can be treated as a good investment scheme for retirement planning, most of the people consider it only as a tax-saving alternative. Some of the crucial features of a PPF account are enumerated below:

• Any Indian citizen may invest in the PPF scheme. One individual can hold only one PPF account unless the second account is locked in the name of a minor. NRIs and HUFs are not eligible for opening a PPF account.
• PPF accounts hold a maturity period of 15 years.
• For opening a PPF account, you might need to find out which of your bank’s branches allows the facility of PPF accounts. Most of the banks enable their customers to access PPF account details online, and one can quickly transfer money from his/her savings account to the PPF account.
• For keeping the PPF account operative, one needs to make a minimum deposit of Rs. 500 each year. Such a deposit can be made at any time during the span of whole year.
• Loan facility against the available PPF balance is open to a subscriber from 3^rd financial year up to the 6^th financial year. The loan amount is capped at 25% of the balance at the end of the 2^nd financial year immediately preceding the year in which the loan was applied for.
• One partial withdrawal is permissible every year from the 7^th financial year onwards. Such withdrawals from the PPF scheme are allowed only up to a specified extent. The withdrawal amount is capped at 50% of the balance at the end of the fourth preceding year or 50% of the balance at the end of the immediately preceding year, whichever is lower.
• The PPF account matures on completion of fifteen full financial years from the end of the year in which the account was opened.
• After maturity, the PPF account can be extended for any number of a block of 5 years with further deposits.
• Also, the PPF account can be retained indefinitely without further deposits after maturity with the prevailing rate of interest.
• As PPF is backed by the Indian government, it provides guaranteed, risk-free returns as well as full capital protection.

Nature of PPF Interest, and how is it calculated?

The interest earned on a PPF account is not fixed, and it owes its determination to the yield on government bonds and securities. The rate of PPF interest has been varying over the past financial years.

The PPF interest is computed on a monthly basis; however, it gets credited to one’s PPF account at the end of the financial year.

Such interest is computed on the minimum balance standing in the PPF account between the 5^th and the end of each month. This signifies that if fresh deposits are made after the 5^th of a particular month, then one cannot avail of interest on such deposits for that particular month. Such deposits will become eligible for earning interest from the next month onwards. In other words, you will not collect any interest for a month if you deposit after the 5^th of that month.

The PPF interest is compounded annually, which means that the interest you earn is not distributed but is reinvested along with your contribution. The interest earned is credited at the end of the fiscal year. The critical point to note here is that while the interest is credited into your account annually, the interest is calculated every month.

Rates of PPF interest

Typically, interest earned on PPF accounts is better than that realized on fixed deposits and is fully tax-exempt. The interest rate on PPF is reset every quarter based on the yields of government bonds of similar tenure. In the past few years, the rates of PPF interest have been as under:

Period of Financial Year	Rate of PPF interest
From 01.04.2013 to 31.03.2016	8.7%
From 01.04.2016 to 30.09.2016	8.1%
From 01.10.2016 to 31.03.2017	8.0%
From 01.04.2017 to 30.06.2017	7.9%
From 01.07.2017 to 31.12.2017	7.8%
From 01.01.2018 to 30.09.2018	7.6%
From 01.10.2018 to 30.06.2019	8.0%
From 01.07.2019 to 31.03.2020	7.9%
From 01.04.2020 onwards	7.1%

(Source: http://www.nsiindia.gov.in/)

It is clearly evident from the history of PPF interest rates that they can offer you an excellent choice for building up the retirement corpus.

Maximize PPF returns – Key points

You should not consider your PPF account as an insignificant investment option wherein you are just bound to fuel in some money once a year. Instead, by a little planning and analysis, PPF can act as a vital part of one’s financial portfolio.

Some of the tips that can help you maximize your PPF returns are given below:

Invest as much as possible: Claiming of deduction under Section 80C should not be the only gravitating factor for depositing money into your PPF account. In fact, one should invest Rs. 1,50,000 in the PPF account, even though his or her 80C tax-saving limit of Rs. 1,50,000 has already been exhausted. One should invest in PPF as much as it is affordable.

Time of investment is essential: If monthly contributions are made to one’s PPF account, then investing before the 5^th of each month will help him/her derive maximum returns, as opposed to investors who invest after the 5^th day of each month. This is so because interest is calculated monthly on the outstanding PPF account balance and, thus, by investing before the interest calculation date (i.e., 5^th) for a particular month, PPF returns will be maximized.

Invest maximum permissible limit in the beginning: One of the ideal ways to maximize PPF returns on your PPF account would be to invest Rs. 1.50 lakh (the maximum permissible amount in a year) at one stretch at the beginning of the financial period. This will allow it to earn interest on such deposit for the whole of the fiscal year. In other words, amounts deposited in April will earn interest for the whole year.

Check compounding of interest: Since PPF is a long-term investment, the compounding of interest earned on its balance can create huge differences. Unlike other products, the interest calculation process in PFF is different. Below are a few examples showing the quantum of interest earned in different situations, how it is calculated, how compounding is done, and how much maturity value is derived.

Scenario 1: PPF Investments made for 15 years (Assuming payments are made at the beginning of the period, and there is a constant interest rate of 8% per annum)

The amount of total interest earned and the maturity value of the PPF account varies under different scenarios. It is the highest when the annual contribution of Rs. 1,50,000 is deposited at one go before the fifth of April.

Scenario 2: Under PPF, interest is computed monthly; however, it is compounded annually. This is shown for a term of 2 years where half-yearly contributions of Rs. 75,000 each are made in a financial year. (Assumed constant interest rate of 8% per annum)

Similarly, for the beginning of the 3^rd year, the PPF balance attracting interest would be Rs. 405,720.

Scenario 3: How PPF interest is computed for a particular year: Assuming amounts are deposited after 5^th of each month (Considered constant interest rate of 7.9% per annum)

Scenario 4: How PPF interest is computed for a particular year: Assuming amounts are deposited before 5^th of each month (Considered constant interest rate of 7.9% per annum)

In this scenario, the interest earned every month is higher than the case when monthly contributions are made after the 5^th of each month, and the annual interest is Rs. 6,418.75 (which represents approximately 18% interest differential).

Takeaway

When it comes to interest earned on long-term investments, especially PPF, even a few hundred collected each month can go a long way and create a ripple effect in maximizing your PPF returns in the long-term. Thus, it is imperative to carefully follow some strategies mentioned above to optimize PPF returns.