Why PPF is one of the most popular tax saving investments; know the reasons
Triple tax exemption
The PPF is one of the few investment instruments to benefit from the triple tax exemption, that is to say the exemption-exempt-exempt (EEA) status. This means that you benefit from a tax exemption at the time of investment, accumulation and withdrawal.
The PPF offers up to Rs 1.5 lakh deduction on investments made in each financial year under Section 80C of the Income Tax Act 1961. Interest earned each year is also tax exempt. Third, the total corpus you get at maturity is also tax exempt, making it non-taxable income.
Highest interest rates among fixed income products
Beneficial because the PPF has floating rates
One of the many reasons the PPF scores higher than products like the 5-Year FD Tax Savings Bank is that it has floating rates. Unlike fixed deposits, where the interest rate is fixed for the entire investment period, the PPF interest rate is floating and can change quarterly. Once the overall interest rate in the economy starts to rise, the interest rate on the PPF will also rise and your investment will start earning higher returns.
The power of compounding works wonders in the long run
If you give your money time to grow, the power of compounding can do wonders for your investment. A PPF account matures in 15 years. Once the account matures, you can either withdraw the entire balance and close the account, or extend it for five years with or without making further contributions. Extension in five-year increments can be done indefinitely.
Tax haven for conservative investors
If you are a conservative investor looking for tax savings with assured return and security of your investment, then PPF is one of the safest and best options. While most major banks currently offer an interest rate of 5.5% or less on their 5-year tax savings FDs, the interest rate offered on the PPF is certainly comes with a good bonus.
A must have for investors in the highest tax bracket
The benefit of Section 80C may not be relevant for most investors in the highest tax bracket as they have other means to use such as EPF, education expenses of children, mortgage principal, term insurance premium, etc. However, the tax-exempt nature of the return makes PPF a much more attractive option, especially when all income is taxed at a rate of 30% or more.