The best gift that any parent can give to his/her kid, apart from a good education, is financial security. One of the vehicles that can ensure financial security in the most secure manner in India is the good old Public Provident Fund or PPF.
Retained relevance
Launched in 1968 in the days of controlled economy, the PPF has survived the transition to a market economy and has remained relevant even in this age of frenzy around equity markets and mutual funds that offer far better returns. The pillars on which this instrument has remained relevant are significant returns, complete safety of capital that is stamped by sovereign guarantee and income tax benefits according to Section 80C of the Income Tax Act 1961.
PPF account can be opened for children
A PPF account can be opened by an adult (parents or legal guardian) on behalf of a child right after birth. Rules simply state that the account has to be transferred in the name of the beneficiary when he/she turns 18 and investments in it can be continued.
E-E-E status
The maximum amount that can be deposited in a PPF account every year is Rs 1.5 lakh. It is listed as a tax-free instrument in Section 80C of the Income Tax Act 1961. Moreover, the entire amount (principal, interest and maturity) is exempt from income tax. The current rate of interest in PPF is 7.1%. It comes up for revision every quarter.
Now let’s calculate what corpus can a PPF account generate for a kid, whose parent might be prudent enough to open a PPF account on his/her first birthday.
PPF calculator
An online PPF calculator states that if Rs 1.5 lakh is invested every year for 50 years, the account will generate a total amount of Rs 6,75,75,988 or more than Rs 6.75 crore. This is the amount the person would get at the age of 51.
Interest 89% of corpus
The point to note is that the nominal investment made by the contributor in this account is Rs 75 lakh. Therefore, the PPF account will generate an interest of Rs 6,00,75,988. The only assumption here is that the interest rate would hold at the current 7.1% — which is one of the historic low rates for this instrument. The returns would actually be higher considering the income tax benefits over this long period.
The Public Provident Fund has earned the trust of generations of Indians due to their power of compounding money for very long time periods under sovereign guarantee. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
