Want a safe option to save tax and fund your retirement? Invest in PPF With Automated Income Tax Revised Form 16 Part B for F.Y. 2019-20

When it comes to saving taxes, the Public Provident Fund (PPF) is one product a lot of people turn to

There are two reasons for this: its tax-free yearly interest and the annual compounding. Since the PPF has a long tenure of 15 years, the impact of compounding is huge, especially in the later years.

Further, because the interest earned is backed by sovereign guarantee, it makes it a safe investment. Therefore, linking one's investment in PPF to a long term goal such as retirement helps.

Download 100 Employees Automated Income tax Revised Form 16 Part B for FY 2019-20 [ This Excel Utility Can Prepare at a time 100 Employees Form 16 Part B ]

Here's how to go about it.

Earnings in PPF
The interest rate on PPF is set by the government every quarter based on the yield (return) of government securities. In 1968-69, PPF offered a 4 per cent per annum interest, while from 1986-2000 it offered 12 per cent. The current interest rate for October 1 to December 31, 2018 is 8.0 per cent per annum.

While the minimum annual amount required to keep the account active is Rs 500, the maximum amount that can be deposited in a financial year is Rs 1.5 lakh. As there is a cap on PPF's annual investment, you will need other investments such as equity-linked savings scheme (ELSS) to shore up your retirement corpus.

Download 50 Employees Automated Income tax Revised Form 16 Part B for FY 2019-20 [ This Excel Utility Can Prepare at a time 50 Employees Form 16 Part B ]

How compounding works in PPF
By investing a maximum of Rs 1.5 lakh every year for 15 years in PPF, at an average interest rate of 7.6 percent, the corpus becomes nearly Rs 42.5 lakh. In PPF, the power of compounding works best over the long term. It also means, one should put in the maximum possible in the initial years so that the funds get time to compound and grow.

Let's say someone invests Rs 1 lakh annually for 15 years, then the corpus adds up to almost Rs 28.5 lakh, at an average interest rate of 7.6 percent per annum. Of the corpus, the interest amounts to about Rs 13.5 lakh, nearly 47 percent.

Now, let's say, Rs 1 lakh was invested only for the first 10 years (minimum of Rs 500 put in to keep account active) and the funds were left to grow till the end of the 15th year. The corpus will be nearly Rs 22 lakh, the interest portion amount to nearly 55 percent. Even without fresh contributions, the interest gets added each year on the previous year's balance and thus compounding takes place.

Even though PPF rules allow partial withdrawals avoid dipping into the corpus, else the purpose of compounding gets defeated. Use it as the last resort if you are hard pressed for funds.

On maturity of PPF

You need not close your PPF account on expiry of 15 years from the end of the year in which initial subscription was made. They can be extended indefinitely in a block of 5 years, with or without making fresh contributions. To meet regular income needs, one is allowed to make partial withdrawals once a year during the extended period.
Download One by One Automated Income tax Revised Form 16 Part B for FY 2019-20 [ This Excel Utility Can Prepare at One by One 16 Part A&B and Part B]

PPF and ELSS
PPF is a debt product and it generates a steady income flow. A product that it is often compared to is the ELSS, a tax-saving equity mutual fund. As the underlying securities in both asset classes are inherently different, the return generated will also be different.

ELSS is a suitable option for those investors who are comfortable with volatility that is inherent in equity investments. On the other hand, since PPF is a debt-oriented investment where one's savings are not exposed to equity, it will suit those who is looking for a steady growth in savings, not necessarily a high return.

What you should do
PPF suits those investors who do not want volatility in returns akin to equity. However, for long-term goals and especially when the inflation-adjusted target amount is high, it is better to take equity exposure, preferably through equity mutual funds like tax-saving ELSS.

Download One by One Automated Income tax Revised Form 16 Part B for FY 2019-20 [ This Excel Utility Can Prepare at One by One 16 Part Part B]

Comparing them, however, is not warranted as both PPF and ELSS belong to different asset classes, with one currently generating around 8.0 per cent returns as compared to the other generating (historical returns) around 12 per cent return. The latter, will anyways have a higher maturity corpus (with relatively more volatility) than the former (with relatively less volatility.) Diversifying one's savings in PPF and equities would serve the purpose rather than relying entirely on just one avenue.

Source From Economic times