In our previous article (Retirement Planning – 4), came in the series of Retirement Planning we have discussed many things about SIP as an avenue of Retirement Planning. This is the fifth article coming in the Retirement Planning series that IndianMoney.com is publishing for our readers. In this article we will discuss about the Public Provident Fund (PPF).
Public Provident Fund (PPF)
Public Provident Fund, generally known as PPF is a 30 year old constitutional plan of the Central Government happening with the object of providing old age profits security to the unorganized division workers and self employed persons. PPF is a savings cum tax saving instrument .PPF is a long-term, government-backed small Savings scheme of the Central government started with the aim of providing old age income security to the workers in the unorganized sector and self-employed individuals. Any individual (salaried or non-salaried) can open a PPF account. He/ She may also subscribe on behalf of a minor, Hindu Undivided Family (HUF), Association of Persons (AOP) or Body of Individuals (BOI). Even NRIs can open PPF account.
An individual can have only one PPF account. Also two adults cannot open a joint PPF account. The total annual contribution by an individual on account of himself, his minor child and HUF/AOP/BOI should not exceed Rs.70, 000 otherwise the excess amount will be returned without any interest. Currently, the interest rate offered through PPF is around 8 per cent which is compounded yearly. Interest is calculated on the lowest balance between the fifth day and last day of the calendar month and is credited to the account on March 31 every year. So to derive the maximum, the deposits should be made between 1st and 5th day of the month.
People who are interested in liquidity or small-term gains would not be excited about PPF because the length for the investment is 15 years. However, the effective period works out to 16 years i.e., the year of opening the account and adding 15 years to it. The contribution made in the 16th financial year will not earn any interest but one can take benefit of the tax rebate. The account holder has an option to extend the PPF account for any period in a block of five years after the minimum duration elapse. The account holder can keep the account after maturity for any period without making any additional deposits. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed.
Things to Remember
There are some conditions concerning the opening of public provident fund schemes in India.
· The person who opens a Public Provident Fund has to open it in his own name. She/he can also open it for a minor who is under his guardianship. The particular individual also has to be a member of Hindu Undivided Family.
· The Public Provident Fund schemes can be opened at the post offices that have been specified by the respective governmental authority. A few selected branches of the public sector banks can also be availed for opening the Public Provident Fund schemes.
PPF Investment a word of care
Public Provident Fund (PPF) has, over the last number of years been one of the best Retirement options. It offers the following benefits;
· High & assured returns
· 100% guaranteed by the Govt. of India
· Tax rebate while investing
· The returns are tax-free.
Below given table can help you to briefly understand the features of PPF.
Rate of interest
8.0% per annum
Where to invest?
Any head post office/Selection grade sub post office and approved nationalized banks.
Who can invest?
An individual (Above 18 years)
A guardian on behalf of a minor.
How much to invest?
Minimum - Rs. 500/-
Maximum - Rs. 70,000/- in a financial year.
Loan: - From 3rd year to 6th year upto 25% of the amount available in the preceeding second year.
· One withdrawal during any one year at any time after 6 year.
· The amount of withdrawal is limited to 50% of the balance at credit at the end of 4th year immediately proceeding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower.
· Rebate on investment U/S 80C of I.T. Act 1961
· Interest income fully expemted from income tax.
· Balance held in the P.P.F. account is completely free from wealth Tax.
The balances in the account cannot be attached by any authority normally.
Extension of benefits
Account may be extended for any block period of five years
PPF does not give any regular income and only provides for accumulation of interest over a 15-year period and the lump-sum amount (principal + interest) is payable on maturity. The lump-sum amount that you receive on maturity (at the end of 15 years) is completely tax-free!! One can deposit up-to Rs 70,000 every year in the PPF account and this money will also not be taxed and be removed from your taxable income.
Eight things to know about Investing in PPF
Bellow given are the eight important things that you should know about Public Provident Fund (PPF).
- Investing in PPF
- Penalty in case of non-subscription
- Tax treatment
Investing in PPF
A PPF account can be opened with a minimum deposit of Rs.100 at any branch of the State Bank of India (SBI) or branches of its connected banks like the State Bank of Mysore or Hyderabad. The account can also be opened at the branches of a few nationalized banks, like the Bank of India, Central Bank of India and Bank of Baroda and at any head post office or general post office. After opening an account you get a pass book which will be used as an evidence for all your deposits, interest accruals, withdrawals and loans.
However be warned: you can have only one PPF account in your name. If at any point it is detected that you have two accounts the second account that you have opened will be closed and you will be refunded only the principal not the interest. Again two adults cannot open a joint account. The account will have to be opened in only one person’s name. Of course the person who opens an account is free to appoint nominees.
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-Payment
The account will happen to outdated 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.
Even though PPF is 15 year plan 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.
If the account is opened during FY 2000-01, the first withdrawal can be affected 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.
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.
On maturity the account can be closed by making an application for withdrawal of whole 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 complete sum can be withdrawn either in lump sum or in installments not exceeding one in a year. If continued with fresh subscriptions, withdrawal is allowable 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.
One or more nominations can be made by the subscriber to recognize 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 evidence 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;
· A letter of indemnity
· An affidavit
· A letter of disclaimer
· The death certificate.
But in practice, if the bank manager is convinced and closely acquainted, he usually pays you the entire sum of money.
The contributions made to the PPF account are eligible for deduction u/s 80C of Income Tax Act. The interest earned and the complete amount received on maturity or premature withdrawal is totally tax-free. Moreover the balance held in PPF account is fully exempt from wealth tax without any limit.
>>>>>>Click here….to understand what is Unit Linked Pension Plans
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 yearly) is free from income tax making it the first among equals for debt-based products. A similar 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 plan. The return of 8% p.a. offered by the scheme actually works out to be higher due to tax benefits and the compounding factor. 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 require depositing the same amount every month or year. Stress-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, compare with debt funds and the fixed deposits; PPF gives the biggest bang for the money.
You should know about Public Provident Fund (PPF)
- The Public Provident Fund Scheme is a statutory scheme of the Central Government of India.
- The Scheme is for 15 years.
- The rate of interest is 8% compounded annually.
- The minimum deposit is 500/- and maximum is Rs. 70,000/- in a financial year.
- One put with a minimum amount of Rs.500/- is mandatory in each financial year.
- The deposit can be in lumpsum or in convenient installments not more than 12 Installments in a year or two installments in a month subject to total deposit of Rs.70,000/-.
- It is not necessary to make a deposit in every month of the year. The quantity of deposit can be varied to suit the convenience of the account holders.
- The account in which deposits are not made for any reasons is treated as discontinued account and such account can not be closed before maturity.
- The discontinued account can be activated by payment of minimum deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year.
- Joint account is not permissible.
- Those who are contributing to GPF Fund or EDF account can also open a PPF account.
- A Power of attorney holder can neither open nor operate a PPF account.
- The grand father/mother cannot open a PPF behalf of their minor grand son/daughter.
- The deposits shall be in multiple of Rs.5/- subject to minimum amount of Rs.500/-.
- No age is prescribed for opening a PPF account.
- Interest is not contractual but rate is notified by Ministry of Finance, Govt. of India, at the end of each year.
- The facility of first withdrawal in the 7th year of the account subject to a limit of 50% of the amount at credit preceding three year balance. Thereafter one Withdrawal in every year is permissible.
- Pre-mature closure of a PPF Account is not permissible except in case of death.
- Nominee/legal heir of PPF Account holder on death of the account holder can not continue the account, but account had to be closed.
- The account holder has an option to extend the PPF account for any period in a block of 5 years on each time.
- The interest on deposits is totally tax free.
- Deposits are exempt from wealth tax.
- Nomination facility available.
- Best for long term investment.
How long I can hold a PPF?
PPF is for 15 years but you can expand it for a block of five years. Let's say you open a PPF account when you are 23 years old. It matures when you are in your late 30s, when you may be earning well and may not need the money. In that case you can continue with the account. Of course you do have the option of withdrawing the whole balance on maturity that is after 15 years of the close of the financial year in which you opened the account.
So if you opened it in FY 2007-08 you will be able to withdraw it 15 years later, starting March 31, 2008. That is April 1, 2023. If you expand it for five years after that you continue to earn the rate of interest and can also make fresh deposits and get the tax benefit.
How to Compare a Pension Plan (PPF)
There are a lot of options available to an individual intending to plan for his retirement. Be it PPF, ULIP, NSC’s etc. Most retirement options fall into two categories, those which promise a fixed certain return and those like pension plans which offer non-assured returns. There are very few retirement planning options available in mutual funds. Most of the people prefer traditional retirement plan because it offers an assured return. Before an investor goes in for a retirement plan he wants to evaluate its various basic parameters:
• Lock in period
• Rebate Eligibility
• Taxability of Interest/Dividend
• Minimum Investment
• Maximum Investment
The comparison of returns with reference to the fixed return instruments like PPF etc. is easy. The returns generate in the case of PPF is again like Infrastructure Bonds, a fixed rate of 8 per cent unlike the returns of pension plans which can vary over a period of time. Also when it comes to comparing the returns between the mutual fund options the investor must keep in mind, the track record of the scheme as well as his timing of entry. Both these factors will impact his return. However in the case of infrastructure bonds, returns are fixed, irrespective of the time of entry. For instance Empirically, Kothari Pioneer Pension Plan (KPPP) has turned in a better performance than Infrastructure Bonds so far. The fund has returned an annualized 15.20 per cent since inception as compared to a return of 9.5 per cent in the case of Infrastructure Bonds.
Lock in period
In case of fixed return instruments like PPF etc, the lock-in period is very long with middle withdrawals after a sure number of years. In case of infrastructure bonds as well as pension funds there is a 3 year lock-in period but in case of Kothari Pioneer Pension Plan (KPPP) the removal at the end of 3 years comes at a nominal penal charge.
In PPF the liquidity is pretty low. A loan can be taken at the end of 3 years to the extent of 25 per cent of the balance at the end of the preceding financial year. A withdrawal is allowable every year from the 7th financial year of the date of opening of the account. So the loan and the withdrawal can be taken after a particular period of time and that too with certain riders. In the case of KPPP, the entire amount is withdrawals after the expiry of three years subject to a penal charge; otherwise the investor can exit only after reaching 58 years of age.
The tax benefits under both the PPF and the pension plans is the same in terms of the section 88 benefit which makes the investor qualified for tax benefits of 20 per cent of the amount invested in the scheme. The infrastructure bonds however offer an additional advantage in terms of improved amount of Rs 80,000 (link) of tax benefit under section 88.
Taxability of Interest/Dividend
Returns from PPF are tax free; Interest received on infrastructure bonds qualifies for tax exemption under Section 80L. This is not the case with dividend received from pension mutual funds like KPPP. Dividend established from KPPP is subject to dividend distribution tax of 10 per cent.
A minimum amount of Rs 500 has to be invested every year to keep the account alive in PPF like the facility of investing in installments of Rs 500 in case of KPPP. Also the minimum amount that can be invested in the pension plans is Rs 10,000. In the case of bonds the investor has to bring in a minimum amount of Rs 5000.
The maximum amount that can be invested under PPF in a particular financial year is Rs 70,000 while there is no such restriction on the maximum amount that can be investing in the pension plans. No tax benefit is however given for investments made above Rs 60,000 in the case of KPPP.
We believe that this article did help you to understand clearly about Public Provident Fund (PPF) and how it helps you to create a strong financial back up for your retirement. PPF is one among the best avenues available for your retirement planning. In our next article we will discuss about Reverse mortgage and how it helps you in your retirement planning.