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Investing in Public Provident Fund (PPF)

IndianMoney.com Research Team | Posted On Saturday, May 02,2009, 12:57 PM

Investing in Public Provident Fund (PPF)

 

 

Introduction
PPF is a 30 year old constitutional plan of the Central Government happening with the objective of providing old age profits security to the unorganized division workers and self employed persons. Currently, there are almost 30 lakh PPF account holders in India across banks and post offices.
 
Eligibility
Any individual salaried or non-salaried can open a PPF account. He may also pledge on behalf of a minor, HUF, AOP and BOI. Even NRIs can open PPF account. A person can contain only one PPF account. Also two adults cannot open a combined PPF account. The collective annual payment by an individual on account of himself his minor child and HUF/AOP/BOI (of which individual is member) cannot exceed Rs.70, 000 or else the excess amount will be returned without any interest.
 
Subscription
The yearly contribution to PPF account ranges from a least of Rs.500 to a maximum of Rs.70, 000 payable in multiple of Rs.5 either in lump sum or in convenient installments, not exceeding 12 in a year.
 
Penalty in case of non-subscription
The account will happen to obsolete if the required minimum of Rs.500 is not deposited in any year. The amount before now deposited will continue to earn interest but with no facility of taking loan or making withdrawals. The account can be regularized by depositing for each year of default, arrears of Rs.500 along with penalty of Rs.100.
 
Where to open
A PPF account can be opened at any branch of State Bank of India or its subsidiaries or in few national banks or in post offices. On opening of account a pass book will be issued wherein all amounts of deposits, withdrawals, loans and repayment together with interest due shall be entered. The account can also be transferred to any bank or post office in India.
 
Interest rate
Deposits in the account earn interest at the rate notify by the Central Govt from time to time. Interest is designed on the lowest balance among the fifth day and last day of the calendar month and is attributed to the account on 31st March every year. So to derive the maximum, the deposits should be made between 1st and 5th day of the month, as it also enables you to earn interest on your Savings Bank A/c for the previous month.
 
Tenure
Even though PPF is 15 year scheme but the effectual period works out to 16 years i.e. the year of opening the account and adding 15 years to it. The sum made in the 16th financial year will not earn any interest but one can take advantage of the tax rebate.
Withdrawal
The investor is allowable to make one removal every year beginning from the seventh financial year of an amount not more than 50% of the balance at the end of the fourth year or the financial year immediately preceding the withdrawal, whichever is less. This facility of making partial withdrawals provide liquidity and the withdrawn amount can be used for any purpose.
 
Example:
If the account is opened during FY 2000-01, the first withdrawal can be effected during FY 2006-07. The fourth financial year immediately preceding the removal will be 2002-03 and the preceding year will be 2005-06. The amount withdraws in the 7th year, FY 2006-07, ending on 31.3.2007 is 50% of the balance to the credit as on 31.3.2003 or 31.3.2006, whichever is lower.
 
Loan
The depositor can take a loan in the third financial year of opening the account for up to 25% of the balance at the end of second previous financial year. Further no loan can be taken after 6th financial year. Ongoing with the preceding example the first loan can be taken through FY 2002-03 for 25% of the balance at the end of FY 2000-01. The loan is to be repaid in 36 months following the month in which loan is taken either in lump sum or in installments. The fresh loan will be given only after previous loan is repaid in full with interest at 1% p.a. over the interest paid on PPF. Moreover, if the loan is not repaid within stipulated time, the interest would be charged @ 6% p.a. instead of 1% p.a. In the event of death of subscriber, his legal heirs/nominee shall repay the interest on the loan.
 
Maturity
On maturity, the account can be closed by making an application for withdrawal of entire balance together with interest after adjustments, if any. However, the account can also be extended for any period in a block of five years at each time, with or without fresh contribution.
 
If the account is continued without fresh contribution, the entire sum can be withdrawn either in lump sum or in installments not exceeding one in a year. If continued with fresh subscriptions, withdrawal is permitted for upto 60% of the balance at the beginning of each extended period in one or more installments, but not more than once a year.
 
Nomination
One or more nominations can be made by the subscriber to accept the amount standing to his credit in the event of his death. Nomination once made can also be cancelled or varied. If the nominee is a minor the depositor can assign any person to receive the amount due during the minority of the nominee. The capability of nomination is also available in case of HUF but not for minors. In the event of death of subscriber the amount standing to his credit after making adjustments, if any shall be paid to the nominee or nominees on making a request by them together with proof of death of subscriber. If any nominee is dead, the proof of death of nominee is also required. However, if the balance is not withdrawn it will continue to earn interest. Fresh contributions and limited withdrawals by nominee are not acceptable after the death of the account holder. It is sensible to open a savings account of the nominee or nominees in the same bank and mention this number in the PPF account opening form. Also, since a single cheque is issued in favour of all the nominees, it would be prudent for the nominees to open a joint saving bank account. Where there is no nomination the balances after making adjustment shall be paid to the legal heirs on production of succession certificate/probate acquire which requires lot of time and paperwork. Therefore, to reduce hardships if the balance is up to Rs1 lakh, it will be paid to legal heirs on production of i) a letter of indemnity, ii) an affidavit, iii) a letter of disclaimer and iv) the death certificate. But in practice, if the bank manager is convinced and closely acquainted, he usually pays you the entire sum of money.
 
Tax treatment
The contributions made to the PPF account are eligible for deduction u/s 80C of Income Tax Act. The interest earned and the entire amount received on maturity or premature withdrawal is completely tax-free. Moreover, the balance held in PPF account is fully exempt from wealth tax, without any limit.
 
Benefits of Public Provident Fund
For one it scores high on safety since your main amount invested carries the Government of India badge of honor. Two with Big Brother watching your investment in a PPF also qualifies for tax breaks under Section 80C of the Income Tax Act. What’s more even the interest earned (8 percent compounded annually) is free from income tax making it the first among equals for debt-based products. A comparable product will have to earn 11.5 per cent at the 30.6 per cent tax rate to be equal to the return that the PPF gives. And there is yet more to come, there is no cost to entry, upholding or exit on this product.
 
The investment in PPF offers highest security as it is a government-backed scheme. The return of 8% p.a. offered by the scheme actually works out to be higher due to tax benefits and the compounding factor (interest on interest earned).
 
You can either open a PPF account at any branch of the State Bank of India and its subsidiaries, a few branches of the other nationalized banks, and all head post offices in the country. Once you open an account do keep count-your investment is limited to an Rs.500-70,000 band in a single monetary year. And you can jolly well chip in to this account for 15 years. Unlike in a bank returning deposit or insurance payments you do not need to deposit the same amount every month or year. Hassle-free investment every year would keep the doctor away. Before maturity, you can make withdrawals from your account starting the sixth financial year. You may even apply for a loan from the third year on. Compared with debt funds and the fixed deposits, PPF gives the biggest bang for the money.  
 

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