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What is Public Provident Fund (PPF) | PPF Account Tax Saving Benefit | PPF Interest Rate - YouTube
Channel: ET Money
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You must be aware of the term PPF which stands for Public Provident Fund.
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When you join a new job or start earning,
almost everyone suggests you to invest in
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PPF to save tax.
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But what is PPF and is it really a good investment
option?
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In this video, we will tell you everything
about PPF.
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But before that...a quick reminder...If you
wish to watch more videos like that, then
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donât forget to click on subscribe button
and press the notification bell!
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So letâs get started.
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The full form of PPF is âPublic Profit Fundâ
and it is a long term savings scheme that
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was launched in 1968 by the National Savings
Institute under the Ministry of Finance.
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Main motive behind starting this scheme was
to encourage people to save and invest.
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Many Indians regularly invest in this scheme to avail deductions of up to Rs. 1.5 lakh under section 80C.
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Now letâs discuss about the features of
this scheme.
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First comes the Risk-Return equation.
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We all invest to earn returns, so now letâs
understand how much return will you after
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investing in it and what are the risk factors
associated with it.
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The government decides the interest rate of
the PPF on quarterly basis.
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Way back when the scheme was launched the
interest rate received on it was only 4.4%.
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However, the interest rates have gone through
many fluctuations since then.
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In fact, in 1999-2000, the interest rate touched
12% but later dropped again.
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Talking about January 2020, the interest rate
is now pegged at 7.9% and the interest on
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your investment is credited to your account
on March 31st every year.
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Since it is controlled by the government,
it is considered to be very low risk and is
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one of the safest investment options.
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In features, now letâs talk about the Investment
limit.
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You can invest from Rs 500 to Rs 1.5 lakh
every year in PPF scheme .
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One important thing to keep in mind is that
it is mandatory to invest in PPF every year for 15 years
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If you fail to deposit the minimum amount
of Rs. 500 in any year, then your account
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will become inactive and to reactivate it
you will have to pay a penalty of Rs. 500.
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So now letâs talk about a very important
thing.
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âLock-inâ period
The lock-in period for this scheme is 15 years,
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which means that you can not withdraw your
money before the term ends.
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Among all other tax saving options, this one
has the longest lock-in period.
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One benefit of 15 years lock-in period is
that, you earn more interest by investing
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for a longer period,.
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Considering uncertainties and important needs in life, the scheme offers an option of partial withdrawal.
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For selected reasons like higher education of your children or medical emergencies, you
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can withdraw after 7th year onwards.
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Now it's time to discuss a very important
point - Tax benefits.
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Besides NPS and Sukanya Samriddhi Yojana, PPF is the only product which qualifies for EEE.
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EEE means exempt-exempt-exempt, which is an
amazing benefit.
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It means you get 3 types of exemptions on
your investment.
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You get your first exemption when you invest
in it.
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By investing up to Rs. 1.5 lakh in PPF every year, you can claim deductions under section 80C.
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This reduces your taxable income and you can
save tax upto Rs. 46,800.
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This means that even though you are investing
Rs. 1.5 lakh, but because of the exemption
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of Rs. 46,800, your actual investment cost
will be only Rs. 1.03 lakh.
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Second exemption is received on the returns
generated on PPF account.
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As per rule you donât have to pay any tax
on returns.
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Your first question would be why is that important?
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Itâs because when compared to say Bank FDs,
you have to pay tax on whatever interest you
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will receive or on what is getting accumulated.
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But it doesnât happen that way in PPF.
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And finally, you donât have to pay tax on
the amount that you receive on maturity.
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so, thatâs the third exemption.
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After learning about tax benefits, now let's understand the eligibility criteria for opening a PPF account
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To open a PPF account, The first criteria
is you must be an Indian citizen.
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You can open only one PPF account in your
name but if you have a minor in your family,
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you can also open a PPF account on their behalf.
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At the same time, NRIs and Hindu Undivided Families
are not permitted to open PPF accounts.
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However, HUF are allowed to invest in one
individual family memberâs account.
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Opening a joint account in this scheme is
not possible.
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Since we are discussing this scheme in detail,
one should also know that the opening charge
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of a PPF account is Rs. 100.
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And you can start an investment with a minimum
of Rs. 500.
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Now as eligibility criteria is clear, you must be thinking how and where can you open the PPF account?
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You can open a PPF account in banks or post
offices.
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Initially you could open PPF account only
in nationalized banks but now private banks
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also provide this facility.
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So now letâs talk about what documents are
required to open a PPF account.
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Application form with your details.
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ID proof like - Aadhar Card, PAN Card, Passport
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Address proof with current address
Signature proof
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Now when you know pretty much everything about
PPF, you should also understand âIs it the
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best tax saving investment option for you?â
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Itâs true that PPF is a safe investment
vehicle, which is a government backed scheme,
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so the risk involved is almost nil.
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But if you want to use it to achieve your
long term goals, then it wonât be a smart choice.
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Main reason behind this is the returns it
gives you.
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Letâs understand it with an example.
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Suppose you are investing in PPF for the higher
education of your child.
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Now PPF is offering you 7.9% return and education
cost is increasing by around 10% every year
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and becoming more expensive.
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If this trend continues, then the final corpus
for higher education could be insufficient.
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Not only this, the lock-in period for PPF
is 15 years, which is longer than all other
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tax saving options.
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Then what is the solution??
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You can invest in ELSS mutual funds.
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This is a mutual fund category wherein you
receive the same tax benefits.
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The lock-in for these schemes are 3 years
which is way less compared to any other tax
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savings investments.
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Talking about long-term returns, with over
5 years investment period, these funds have
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actually beaten returns of PPF.
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Higher returns means higher compounding, which
directly means a bigger investment corpus.
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But a word of caution.
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Since ELSS funds invest in the stock market, you will see lots of fluctuations in their returns.
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It is possible that for 1 or 2 years you may
not receive any returns or earn negative returns.
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But in the long term, ELSS mutual funds have
given historically around 11% average annual return.
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So if you are investing in ELSS, then do not
expect the same returns every year.
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And with this, we have come to the end of
our video.
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If you want to know how much tax you can save,
and how much and where you should invest,
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then download ETMONEY app by clicking on the
link given under description.
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You will get a personalized tax savings plan for free and you can invest instantly in all the tax savings options.
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