Salient Features of Public Provident fund (PPF)

Public Provident Fund Account.

Public Provident Fund or PPF is one of the most popular investment options in India on the fixed income side.  Investment in PPF scheme benefits an individual by way of tax saving, interest earn is also free from taxes under the provision of Income Tax Act. Though most make investment in PPF to fulfill the criteria of 80C limit of Rs. 1.5 lacs (enhanced from Rs 1 lac  to Rs 1.5 Lac in the 2014 budget), one has to understand its significance beyond that.

Let us look at the some of the basic facts relating to the scheme and also what makes it an extremely attractive investment option.

Eligibility and Investment limit

Any individual (whether salaried or self employed) can open a PPF account in his own name or on behalf of minor. A person cannot open more than one account in his or her name; joint account is also not allowed.

One is free to nominate one or more individual. On the death of the account holder, nominees cannot keep the account going by making contributions. If there are no nominees, the legal heirs get the money. You can open one account for yourself and others for your child/ children. 

The minimum amount of investment in a PPF account is Rs 500 per annum and the maximum amount of investment in a year now  is Rs 1,50,000. In case of a minor's account, the investment in the minor's and guardian's account together cannot exceed Rs 1, 50,000 per annum.

NRIs are not allowed to open any new PPF Account. However, if someone opens a PPF Account while he is a Resident of India but subsequently becomes a NRI, he shall be allowed to continue investing in his account. However, If you are an NRI at the time the deposit matures, you would need to withdraw the balance. An NRI is not eligible for extension on the PPF account.

Deposit to PPF account can be made in a maximum of 12 installments in a year.

Where can account be opened?

PPF account can be opened in any post office and some authorized branches of banks. Though opening PPF in authorized branches of bank is more preferred as bank permits online deposit into PPF accounts whereas post offices don’t provide this facility.

The PPF account is valid for 15 years. The entire balance, the 

Time Duration of PPF can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account.  It can be extended for a period of five years after that and by five years again and again. During these five years, you earn the rate of interest and can also make fresh deposits.

Loan on PPF Account

Loans can be availed from the 3rd financial year excluding the year of deposit. Amount of such loans must not exceed 25 percent of the amount that stood to the account holder’s credit at the end of the second year immediately preceding the year in which the loan is applied for.

A fresh loan is not allowed when a previous loan or interest is outstanding. Interest is charged at a rate of 1% if repaid within 36 months and at 6% on the outstanding loan after 36 months. The repayment may be made either in lump-sum or in Installments.

Premature withdrawal from PPF

The entire amount in your account could be withdrawn only on maturity. However, in times of financial crises partial withdrawals are permitted subject to certain ceiling limits. You could withdraw once a year, from the 7th year onwards. Such withdrawals, must not exceed, 50% of the balance at the end of the fourth year, or 50% of the balance at the end of the immediate preceding year, whichever is lower.

Rate of Interest

Rate of interest of the PPF account is not fixed and gets change every fiscal year. The current  rate of interest paid, is 8.7% p.a. The interest on the opening balance and the deposits made during the year gets credited to the account every year on March 31. The interest is compounded annually.

Tax Exemption

a. The annual investment into PPF account qualifies for a deduction under Section 80C

b. The interest earned on the PPF account every year is not taxable

c. The lump sum withdrawal at the time of maturity is not taxable

This makes PPF an extremely tax efficient investment option.

Highlights:

1. If someone does not make any deposit in a year in PPF, the account gets discontinued. However, the account can be revived by payment of Rs 50 for every year of discontinuation along with the arrears of subscription of Rs 500 per year.

2. Ideally, deposits into PPF account should be made between 1st and 5th of the month to get interest for that month. This is because interest gets calculated on the minimum balance between the 5th day and end of the month.

3. It is possible to take a loan as well as make withdrawals from your PPF account, subject to certain conditions.

4. A PPF account is free from attachment by a court in respect of any debt or liability incurred by the PPF member. It is also exempt from Wealth Tax.

5. Though interest rate in fixed deposit is higher than interest in PPF, but interest amount in PPF is tax free whereas interest in Fixed Deposit is taxable. Thus if one calculate interest on FD after deduction of tax, the effective interest rate is more in PPF account as compared to FD.

Best and Safe investment - Public Provident Fund (PPF)

Why (Public Provident Fund) PPF

Of all the avenues of safe investment with good returns, I consider investment in PPF as one beyond compare. Zero risk. One should study the article in detail and all questions will be well answered there.

In fact, I would like each and every student in school to have a PPF account if their parent can afford to put an amount of Rs 1000 in a year. I would like all teachers in schools to take up this matter earnestly, one that is going to help the students to no end. By opening an account early, say, for a student even in Standard II or III and subscribed and operated by the guardian as a minor account, the 15 year maturity period is totally conquered. By the time the child finishes education and enters the field of employment ,the PPF Account would have been there for over 12-14 years and the child, now an adult will immensely benefit by tax savings alone on further investments from earning.

The best part is that the money subscribed after commencement of earning will be close at hand and available. The ‘15 year wait for maturity’ will no longer be a fear to contend with. Simple.

Any queries sent to the author will definitely be addressed as there is no better investment for tax saving as well as totally tax free income of the interest earned and the account cannot be attached in any court of law.