The Public Provident Fund scheme is one of the most popular investments in India today. And that is no surprise since it provides tax deductions, your maturity (interest) is exempt from tax, and it is a perfectly safe instrument which cannot be attached in case of debt or liability. This is money that will be yours forever.
Knowledge of the different features of the PPF account will help you when you want to take a loan against the account, withdraw from the account, re-activate a discontinued account and much more.
This article has been brought to you simply to provide more information and important points to keep in mind, regarding your PPF account.
Let’s start at the beginning.
What is PPF?
Public Provident Fund (PPF) is a scheme of the Central Government, framed under the PPF Act of 1968. Briefly, the PPF is a government backed, long term small savings scheme which was initially started by the Government because it wanted to provide retirement security to self employed individuals and workers in the unorganized sector.
It is today the most popular investment made by Indian citizens.
If you are keen on a safe investment, a decent rate of return, tax benefits (deduction and tax free interest) and have a long term investment horizon, then the PPF is for you. It is a disciplined investment avenue as your money is blocked for 15 years. PPF also offers loan against the account which can help you during occasions like a wedding in the family, further studies of your children, etc. Above all that it gives you a peace of mind as your money is safe.
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What are the main features of the PPF account?
Let’s see what the main features of the scheme are:
|Interest rate ||8% p.a. compounded annually |
|Tenure ||15 years (plus the first year of investment) |
|Minimum Investment Amount || Rs 500 p.a. |
|Maximum Investment Amount || Rs 70,000 p.a. |
|Tax Benefit ||Under Section 80C, interest is tax exempt |
What are the benefits of having a PPF account?
To reiterate, investments into your PPF account are deductible (up to Rs 70,000 p.a.).
Interest earned on the investment is completely exempt from tax, so that’s a return of 8% p.a. tax free.
The account cannot be attached to any claim in case of debt or liability, so the money is yours for life.
There are other features and benefits, which we will go into ahead.
How do I open a PPF account? What should I keep in mind when opening my PPF account?
Head over to your nearest State Bank of India branch, or a branch of any of State Bank’s subsidiaries.
You can also open an account in select nationalized banks, and the post office. Fill in the form, attach a photograph, state your PAN Number, and you’re done. Once your formalities are completed, you will receive a pass book which will record all your PPF transactions.
At any point in your life, you are allowed to have only 1 PPF account in your name.
You can also have an account in the name of a minor child of whom you are the parent / guardian. However that will be the child’s account, you will simply be the guardian.
You can never have a joint account.
If at any time it is seen that you have more than 1 account in your own name, the second account will be deactivated, and only your principal will be returned to you.
If you have a General provident Fund account, or an Employees Provident Fund account, you can still have a PPF account – there is no restriction.
What do I need to keep in mind when making deposits into my PPF account?
Firstly, you can invest in multiples of Rs 5 with a minimum investment of Rs 500 per annum, and a maximum of Rs 70,000 per annum. Any amount invested above Rs 70,000 will not earn any interest and not be eligible for deduction u/s 80C.
You don’t need to invest it all in one shot, you can invest into your PPF like an SIP, making up to 12 installments in a year of different amounts, but not more than 12 investments in a year.
Your interest will be calculated on the minimum balance in your account between the 5th and the last day of every month, so if you were planning on investing into it monthly, make sure you invest (i.e. your PPF account is credited with the investment amount) on or before the 5th of every month.
Can I take a loan against my PPF account?
Yes. You can take a loan from the fund in case of need, you need not wait till you can withdraw from the account.
The first loan can be taken in the third year of opening the account i.e., if the account is opened during the year 2007-08, the first loan can be taken during the year 2009-2010. The loan amount will be restricted to 25% of the balance including interest for the year 2007-08 in the account as on 31/3/2008.
The loan must be repaid in a maximum of 36 EMIs
You can take a second loan against your PPF account before the end of your sixth financial year, but your second loan can be taken only once your first loan is fully settled.
Can I make withdrawals from my PPF account? What is the schedule?
Yes, you can make one withdrawal per year starting from your seventh year.
The first withdrawal can be done after the expiry of 5 full financial years from the end of the year in which your initial subscription was made. This means that from the day you open your account, you will need to complete 6 full financial years before you can make any withdrawal.
Thereafter, you can make one withdrawal per year.
The amount of withdrawal will be limited to 50% of the balance at credit at the end of the fourth year immediately preceding the year in which the amount is to be withdrawn, or the balance at the end of the preceding year, whichever is lower.
For example: if you opened your PPF account on April 1st, 1993, you can make your first withdrawal after April 1st 1999, and the amount of withdrawal will be limited to 50% of the balance as 31st March, 1995, or the balance on 31st March 1999, whichever is lower.
The withdrawal amount is not repayable.
What are my options once my PPF account matures?
You have 3 choices.
Either you can withdraw your maturity amount, or you can extend your account by a 5 year block, as many times as you want and make fresh contributions, or you can extend the account without making any further contributions, and continue to earn 8% interest on it every year.
If you decide to withdraw your money, your maturity value is exempt from tax.
If you decide to extend your account and continue making fresh contributions, you can extend it for a block of 5 years at a time, as many times as you want, you can also make withdrawals from the account, up to 60% of the account balance that was there at the beginning of the extended period. Just remember, if you choose to extend your account, submit the necessary documentation for extension before one year passes from the maturity date.
If you choose to extend your account without making any fresh contributions, you can do so. In this case, any amount can be withdrawn without any restriction, however you can only withdraw once per year. The balance will continue to earn interest till it is withdrawn.
What happens if I forget to invest one year?
Your account is considered de-activated. In order to re-active your account, you need to pay a fine of Rs 50 for each year that you have not made any subscription, and also make a minimum subscription of Rs 500 for each year you have missed. Then your account will be reactivated and you will re-start earning interest.
The account will only be closed after maturity and will continue to earn interest till it is closed. The facility of loan or withdrawal will not be allowed from such account.
However, the account can be regularized by remitting a penalty of Rs 50 per financial year and this should be credited to Government of India /Reserve Bank of India.
How do I close, transfer or extend my PPF account?
You can close the account after completion of 15 years or the expiry of 15 years from the close of the financial year in which the initial subscription was made.
In case of death of the account holder, the balance amount in the account of the deceased account holder will be paid to his nominee or legal heir, as the case may be, even before expiry of 15 years. The nominee or legal heir cannot continue the account by making fresh subscriptions to it. If the balance in the amount is more than Rs 1 lakh, then the legal heir or nominee has to prove identity and provide the relevant documentation to claim the amount in the PPF account.
Your PPF account can be transferred at the request of the subscriber from one office of SBI or its associates to the Head Post Office or vice versa. A PPF account cannot be transferred from one person to another.
From a Financial Planning perspective…
Broadly, the PPF account is a good thing to have, especially for those individuals who do not work in the corporate sector and hence don’t have an EPF account. From a tax perspective, this is a very sound avenue, giving you tax deductions on investment as well as tax exemption at the time of maturity. This money is yours for the keeping – it cannot be attached by order of a court to any debt or liability you may have.
However it is important to note that from a liquidity point of view, your funds are locked in for 15 years, and withdrawals are limited. Given that it is such a long term investment (16 years from beginning to end), the rate of return is 8% which can be considered low for this tenure.
There are other investments that give you a higher rate of return, the same tax benefits and have a shorter lock in period, such as Equity Linked Savings Schemes (ELSS). The ELSS carries market risk since it is an equity investment, while the PPF carries no market risk and is backed by the Government.
To conclude, when choosing your tax saving avenue, be sure to choose according to your risk appetite. If you are a conservative to moderate investor, the PPF can be a very good avenue indeed.