Public Provident Fund or PPF is a popular long term savings scheme constituted by the Government. This scheme not only allows you to save for the long term, but what makes it more attractive is the tax benefits you get by investing in it. This article talks about the various aspects of PPF, including how it is opened, the tenure and investment requirements, loans and withdrawals and what happens on maturity.
The Public Provident Fund or PPF as it is commonly known is a scheme of the Central Government formed under the PPF Act of 1968. This was initially started as a long term savings scheme for self employed individuals. Later, on the back of its advantages, even the salaried class started investing in it, making it a favourite long term savings avenue. Today, PPF is a popular investment option.
PPF is safe as it is Government backed and also gives you tax savings. It is long term in nature and gives you decent returns, if you compare it with other options on a post tax basis. Let’s look at some common and not-so-common aspects of PPF:
Why PPF? As mentioned earlier, this is for the long term. Therefore, many individuals open a PPF account to meet long term goals like the higher education or marriage of children. However, this is also a popular retirement savings option, especially for people who start investing a little late in life. The present interest rate is 8.8% per annum (this is subject to change from time to time) and the income earned is tax free as well. The returns are therefore commensurate and in some cases, even better when compared to other debt options which offer safety.
How is a PPF account opened? A PPF account can be opened at the post office or in a designated branch of any of the specified banks. Certain public and private sector bank branches have been designated by the Government to act as collection centres for PPF accounts. If you want a PPF account, you must first ascertain which bank and branch is authorised to open one for you. Then you must submit the required documents – account opening form, ID proof, address proof, two photographs and the pay-in slip with which you will be transferring the money to the account. On opening the account, a PPF passbook will be given to you. This will contain all the transaction details and can be used to claim Income Tax deductions. Banks may insist that you open a savings bank account with them before opening a PPF account. However, this is not compulsory.
What is the investment and lock-in requirement? The minimum and maximum investment amount in a year is Rs. 500 and Rs. 1 lakh respectively. This amount can be invested either annually or on a monthly basis. The tenure of a PPF is for 15 years (in addition to the first year of investment), so your money will be locked in for this period. However, there is a facility to take a loan or withdraw partially from the PPF account after a stipulated time.
PPF is safe as it is Government backed and also gives you tax savings. It is long term in nature and gives you decent returns, if you compare it with other options on a post tax basis. Let’s look at some common and not-so-common aspects of PPF:
Why PPF? As mentioned earlier, this is for the long term. Therefore, many individuals open a PPF account to meet long term goals like the higher education or marriage of children. However, this is also a popular retirement savings option, especially for people who start investing a little late in life. The present interest rate is 8.8% per annum (this is subject to change from time to time) and the income earned is tax free as well. The returns are therefore commensurate and in some cases, even better when compared to other debt options which offer safety.
How is a PPF account opened? A PPF account can be opened at the post office or in a designated branch of any of the specified banks. Certain public and private sector bank branches have been designated by the Government to act as collection centres for PPF accounts. If you want a PPF account, you must first ascertain which bank and branch is authorised to open one for you. Then you must submit the required documents – account opening form, ID proof, address proof, two photographs and the pay-in slip with which you will be transferring the money to the account. On opening the account, a PPF passbook will be given to you. This will contain all the transaction details and can be used to claim Income Tax deductions. Banks may insist that you open a savings bank account with them before opening a PPF account. However, this is not compulsory.
What is the investment and lock-in requirement? The minimum and maximum investment amount in a year is Rs. 500 and Rs. 1 lakh respectively. This amount can be invested either annually or on a monthly basis. The tenure of a PPF is for 15 years (in addition to the first year of investment), so your money will be locked in for this period. However, there is a facility to take a loan or withdraw partially from the PPF account after a stipulated time.
How does one earn maximum interest on PPF? Interest on PPF is calculated on the minimum balance between the 5th and last day of the month. So if you want to earn maximum interest on your deposits, you must invest before the 5th of every month. If you are making an annual investment, remember to invest your money before 5th April to earn the maximum interest.
How does one take a loan or withdraw from PPF? If you wish to take a loan on your PPF, you can do so only after one year and before five years from the end of initial investment year, by applying in Form D. For example, if you start investing in October 2013, you can take a loan only between 31st March 2015 and 31st March 2019. The maximum amount of loan that can be taken is 25% of the balance in the account as at the end of 2 years before the year of the loan application. In the above example, if you wish to borrow in FY 2017-18, you can borrow upto 25% of the balance as on 31st March 2016.
You can also withdraw from your PPF account instead of taking a loan. But this is permissible only after the expiry of 5 years from the end of the financial year in which the initial subscription is made. You can withdraw only once every year by using Form C. The amount is restricted to 50% of the amount outstanding at the end of the fourth year before the year in which the withdrawal request is given or the balance as of the previous year end, whichever is lower.
What happens if one does not invest in any year? If you forget to invest in a year for whatever reason, the account becomes inactive. You will need to pay Rs. 50 as a fine for every year you have missed and also pay a minimum subscription of Rs. 500 for every year you have not invested. On making these payments, the account will get activated again, and will start earning interest.
What happens on maturity? On the maturity of the 15 year tenure, you can either choose to close the account and withdraw the balance or you may continue with the account. If you choose to continue, you can extend it in blocks of 5 years. Again, if you extend the account without closing, you may do so either by opting to make fresh contributions or to simply extend it without making contributions. Either way, your account will continue to earn interest on the outstanding balance. The request to extend the account should however be made within 1 year from maturity date. On extension, you can make 1 withdrawal a year, provided the total withdrawals in the 5 year period do not exceed 60% of the account balance in the beginning of the extension period.
What about PPF and NRIs? NRIs cannot open a PPF account. However, if a person has a PPF account and subsequently becomes a NRI during the 15 year period, then this account can be continued. He can also continue to invest in the account till maturity on a non-repatriable basis.
Let’s talk about tax treatment? PPF enjoys the EEE status on taxation, ie: Amounts invested are eligible for tax deduction under Sec 80C upto Rs. 1 lakh a year, interest earned every year is exempt from tax and maturity proceeds are also exempt from tax. The attractive tax treatment of this instrument is what makes it a popular option for long term savings.
What happens when the individual dies? On death of the individual, the balance in the account (less any outstanding loans and interest on such loans) is paid to the nominee or the legal heir, as the case may be. This will be done even if the eventuality occurs before the completion of the 15 year tenure. The nominee will need to provide the death certificate and also proof of identity. If there is no nominee named, the legal heir will need to provide a whole host of documents, including the death certificate, indemnity letter and affidavits to claim the amount. It is therefore very important that you name a nominee at the time of opening the account itself.
How does one take a loan or withdraw from PPF? If you wish to take a loan on your PPF, you can do so only after one year and before five years from the end of initial investment year, by applying in Form D. For example, if you start investing in October 2013, you can take a loan only between 31st March 2015 and 31st March 2019. The maximum amount of loan that can be taken is 25% of the balance in the account as at the end of 2 years before the year of the loan application. In the above example, if you wish to borrow in FY 2017-18, you can borrow upto 25% of the balance as on 31st March 2016.
You can also withdraw from your PPF account instead of taking a loan. But this is permissible only after the expiry of 5 years from the end of the financial year in which the initial subscription is made. You can withdraw only once every year by using Form C. The amount is restricted to 50% of the amount outstanding at the end of the fourth year before the year in which the withdrawal request is given or the balance as of the previous year end, whichever is lower.
What happens if one does not invest in any year? If you forget to invest in a year for whatever reason, the account becomes inactive. You will need to pay Rs. 50 as a fine for every year you have missed and also pay a minimum subscription of Rs. 500 for every year you have not invested. On making these payments, the account will get activated again, and will start earning interest.
What happens on maturity? On the maturity of the 15 year tenure, you can either choose to close the account and withdraw the balance or you may continue with the account. If you choose to continue, you can extend it in blocks of 5 years. Again, if you extend the account without closing, you may do so either by opting to make fresh contributions or to simply extend it without making contributions. Either way, your account will continue to earn interest on the outstanding balance. The request to extend the account should however be made within 1 year from maturity date. On extension, you can make 1 withdrawal a year, provided the total withdrawals in the 5 year period do not exceed 60% of the account balance in the beginning of the extension period.
What about PPF and NRIs? NRIs cannot open a PPF account. However, if a person has a PPF account and subsequently becomes a NRI during the 15 year period, then this account can be continued. He can also continue to invest in the account till maturity on a non-repatriable basis.
Let’s talk about tax treatment? PPF enjoys the EEE status on taxation, ie: Amounts invested are eligible for tax deduction under Sec 80C upto Rs. 1 lakh a year, interest earned every year is exempt from tax and maturity proceeds are also exempt from tax. The attractive tax treatment of this instrument is what makes it a popular option for long term savings.
What happens when the individual dies? On death of the individual, the balance in the account (less any outstanding loans and interest on such loans) is paid to the nominee or the legal heir, as the case may be. This will be done even if the eventuality occurs before the completion of the 15 year tenure. The nominee will need to provide the death certificate and also proof of identity. If there is no nominee named, the legal heir will need to provide a whole host of documents, including the death certificate, indemnity letter and affidavits to claim the amount. It is therefore very important that you name a nominee at the time of opening the account itself.
This article was originally published on Indianotes.com
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