PPF: How can it generate tax-free income?

When it comes to safe investments in India, the Public Provident Fund (PPF) stands as one of the most popular choices. Launched in 1968, this PPF scheme

is designed to encourage small savings while providing attractive tax-free returns. It is backed by the central government and is considered an excellent option for conservative investors who prioritise security, long-term growth, and tax savings.

What makes PPF truly special is its EEE (Exempt-Exempt-Exempt) status. This means your investments qualify for tax deduction, the interest earned is tax-free, and the maturity amount is also tax-free. In this article, we will explain what PPF is, its features, benefits, and how you can use it to generate tax-free income while building a solid retirement corpus.

What is PPF?

The Public Provident Fund (PPF) is a long-term savings scheme regulated by the Government of India. It comes with a 15-year lock-in period, extendable in blocks of 5 years.

Investors can open a PPF account at any post office or authorised bank.

Minimum investment: Rs 500 per year
Maximum investment: Rs 1.5 lakh per year
Tenure: 15 years (with option to extend in blocks of 5 years)
Interest rate: Currently, it offers a 7.1 per cent per annum interest rate

What are the features of PPF?

Here are the highlighting features of PPF:

1. Safe and secure – Being government-backed, your money is risk-free.

2. Flexible deposits – You can invest monthly, annually, or in lump sums.

3. Partial withdrawals – Allowed after the account has completed 7 financial years, allowing you to withdraw up to 50 per cent of the balance present at the end of the 4th preceding year, or the immediately preceding year, whichever is lower..

4. Loan facility – You can take a loan against your PPF balance between the 3rd and 6th year.

5. Nomination facility – You can nominate family members to secure your savings.

What are tax benefits of PPF?

The biggest highlight of PPF is its tax-free nature:

Exempt from investment: You can claim a deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.
Exempt from accumulation: The interest earned is completely tax-free.
Exempt at maturity: The entire maturity amount, including interest, is tax-free.

How to generate tax-free income with PPF?

1. Regular Contributions: Deposit consistently every year (ideally maximum of Rs 1.5 lakh) to build a sizable corpus.

2. Interest Compounding: Since PPF interest is compounded annually, your wealth grows faster over time.

3. Long-Term Discipline: The 15-year lock-in ensures you stay invested, allowing compounding to work.

4. Tax-Free Returns: Unlike FDs or savings accounts, where interest is taxable, PPF income is entirely tax-free.

5. Retirement Planning: At maturity, you receive a lump sum tax-free amount, which can be used as retirement income.

For Example, if you invest Rs 1.5 lakh per year for 15 years at an average of 7.1 per cent interest, your PPF account can grow to around Rs 40 lakh, entirely tax-free.