Do you have Rs 1 lakh to spare?

Invest in Public Provident Fund before April 5 to earn maximum returns for the entire financial year

With the financial year starting on Tuesday, being a little smart now will help earn better returns. An example: Many people, including employees, show preference for the Public Provident Fund (PPF) for two reasons: One, it is safe and provides steady returns over the long term. Two, the returns are  tax-free.

But in order to earn the maximum returns of 8.7 per cent, you should deposit the entire Rs 1 lakh before April 5. “Irrespective of the tax bracket, we advise people to invest in the PPF at the start of the year,” says financial planner Suresh Sadagopan.

Why? It’s because the government pays the rate of interest on the least balance between the 5th and 30/31st of every month. In other words, if you deposit any amount after April 5, it will earn no interest for that month. So, the ideal way to maximise the interest on your PPF account would be to invest Rs 1 lakh (the maximum investible amount in a year) in one go. Suppose, you don’t have Rs 1 lakh now and want to deposit Rs 10,000 every month in 10 instalments, the plan should be to invest before the 5th day of every month.

The benefits of having a PPF account are many. And, it can be used in different ways. According to Sadagopan, if you want to save for long-term goals like children’s education or their marriage and retirement planning, PPF is an ideal instrument to do so. “You can start a PPF account in the child’s name, so that when he goes for further studies, he will have a tax-free corpus in hand.” In fact, instead of looking at children's insurance plans to save for the child’s future, it makes sense to go for PPF. He also advises investing in the wife or husband’s name because the taxation based on clubbing of income will not apply here.

While a PPF account matures in 15 years, the tenure can be extended in blocks of five years after maturity. The balance continues to earn interest at the normal rate. The good part: The minimum investment of Rs 500 has to be maintained even for accounts extended beyond 15 years. This does not mean your money is locked for this period. The lock-in period falls with every passing year.

If you need money, you can withdraw after the sixth year, but it cannot exceed 50 per cent of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower. You can also withdraw only once in a financial year. You can also take a loan against it. But remember till one loan is repaid, you cannot take more loans.

There are many other things that you can do at the start of the financial year. If you want to have any investment plans, instead of bunching everything up for the end the financial year, do it in instalments from April itself. This will reduce the financial burden at the end of the financial year.