Public Provident Fund best option to Save Tax
Risk Free Investment, Assured return, Compounding interest benefit, Government Backed Deposit Scheme to save tax: PPF, A complete package
Public Provident Fund: When it comes to choosing a better option to save income tax, most of the people choose to invest in insurance policies. The reach of an insurance agent is so easy that within minutes one can take a policy. Still insurances are not categorized as a best option to invest in specially for tax saving purposes. There are many other investment ideas for this purpose. As you can opt to open a tax saving Fixed deposit with banks and post office schemes, mutual funds, long term deposits which are categorized under tax saving act. Another one of the most popular and high yielding ideas is the Public Provident Fund. Let’s read this article on How to Save Tax by opening Public Provident Fund account.
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How Public Provident Fund help in saving tax and features of PPF-
The Finance Ministry’s National Saving Institute (NSI) launched this scheme in 1968 to encourage saving habits in people who earn a fixed income. For more information you can read an article on “Public Provident Fund”.
The money invested in the scheme fetch you tax rebate of maximum Rs. 1,50,000/- per year and income tax act section 80C. Also, one can invest a minimum Rs. 500/- per year to keep the account active.
There is a lock in period of fifteen years on the amount invested in this scheme. However the investor has facility and is given an option to partially withdraw money every year after completion of 7 years. The interest earned on PPF is free from Tax under Section 10 of Income Tax Act.
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Why to invest in PPF?
PPF is one of the schemes which is presently yielding 7.1% p.a. return compounding each year. There is hardly any scheme which is risk free at this rate of return. One can even continue to get a prevailing interest rate after the maturity of the account in blocks of 5 years.
What are the other options to invest ? How PPF is different from Mutual Fund, NSC, Tax Saving Fixed Deposit, ELSS (Equity linked saving scheme) and ULIP (Unit Linked Insurance Plan)
There are following alternatives of PPF (Public Provident Fund) which are –
1. Mutual Fund,
2. NSC (National Saving Certificate),
3. Tax Saving Fixed Deposit,
4. ELSS (Equity linked saving scheme)
5. ULIP (Unit Linked Insurance Plan)
Mutual Funds are very popular among youngsters. Nowadays financial companies are marketing their own funds to source easy money from public funding. Mutual funds are providing good returns but since it is linked to the equity market, there is always a risk of losing return. The COVID period is the best example to explain the difference and working of mutual funds. Almost all the mutual funds are in negative trend in terms of last one year return while Public Provident Fund provide risk free return.
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NSC (National Saving Certificate) –
Another alternative is NSC (National Saving Certificate). Which is also a good government scheme to encourage savings, It aims at small and middle income investors. It Provides fixed 6.8% return without any risk with a lock in period of 5 years. NSC can be opened with only post offices in India by individuals. HUF and trusts are not eligible for opening an NSC.
Tax Saving Fixed deposits –
Fixed deposits which are opened for tax saving purposes are easy to opt. This can be opened with net banking or mobile banking. However, the interest rate Tax Saving Fixed deposits fetch is as low as 5-5.50% p.a. with a locking period of 5 years.
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ELSS (Equity linked saving scheme) –
This scheme is completely linked to the equity market and the return is subject to share market trends. In the long run Equity linked saving scheme can yield a high rate of return as seen in previous years but the rate of return is not fixed. There is a risk to invested capital also.
Insurance Plans – Presently in the market there are many private insurance agencies which are available for tax saving purposes. These schemes are providing good returns but are managed by private institutions which are not as safe as government schemes. However, there is no previous record of default about such insurance companies.
Let’s conclude the article. By comparing the schemes available and various options under section 80C of IT act, we can clearly see that the Public Provident Fund (PPF) is the best option to choose for tax saving as well as competing with inflation in terms of return. All commercial banks (private or public sector banks) or with Post Offices provide facility to open PPF accounts. It can be opened through offline as well as online mode. PPF accounts can also be transferred to any place in India hence investors get flexibility to choose the location. Read the article on how to open a PPF account to start investing.
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