Public Provident Fund: Smart tips to make the most of PPF

Public Provident Fund (PPF) is an excellent tool for long-term investment. Wrapped in safety and free of tax, the PPF is almost a godsend for risk-averse investors. It is risk-free as it is backed by the government.

It is especially suitable for self-employed professionals and small businessmen who are not covered by the Employees’ Provident Fund. Those who don’t have access to an organised setup can realise long-term goals through the PPF.

Don’t think of your PPF account as a stodgy investment option where you put away something once in a year. With a little planning, it can be an important part of your financial portfolio.

Here are a few tips that will help you make the most of this option: 

Maximise limit

The 7.9% compounding interest you earn on the balance can work wonders for you, especially because a PPF account is a long-term investment. There is an annual limit of Rs 1.5 lakh that one can invest in the PPF. You may feel it is a waste to be investing Rs 1.5 lakh in this option when your Rs 1.5 lakh tax saving limit under Section 80C has already got exhausted.

But don’t let the tax savings alone guide your decision. Invest as much in PPF as you can afford to. If you contribute Rs 1.5 lakh a year to your PPF for 15 years, your investment would grow to a gargantuan Rs 22.50 lakh on maturity.

And remember, this is tax-free money. In the 30% tax bracket, this is equivalent to receiving almost 11.5% interest on a bank fixed deposit. The PPF offers the highest post-tax returns among all fixed income options since no tax is levied on the investment, income and withdrawals. 

Distribute income

There are benefits in store if you open a PPF account in the name of your spouse or child. Tax laws say that if any money gifted to a spouse is invested, the income from that investment is clubbed with the income of the giver. But since PPF income is tax free, it will not push up your tax liability. This way, you can invest more than `1.5 lakh a year in this tax-free haven and benefit from its various advantages.

This strategy does not work in case of minor children though. You can open a PPF account in the name of a minor child but remember, the combined contribution to your and your child’s account cannot exceed Rs 1.5 lakh a year. 

Invest for children

However, if the child is over 18 years, up to Rs 1.5 lakh a year can be invested in his name separately. Once they turn 18, children can have a separate income. A PPF is an ideal way of building a fund for your child’s educational needs instead of falling for all the “high-commission-paying” child plans of insurers.

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