Public Provident Fund or PPF is one of the most popular investment options in India on the fixed income side. This scheme, introduced by the Central Government in 1968, enables the members of the public to make contributions to the fund and at the same time avail certain tax exemptions under the provisions of the Income Tax Act.
PPF is one of the most tax efficient investments and it is important that one understands the significance of this product beyond the realm of being just one of the options to fulfil the criteria of 80C limit of Rs 1 lakh in the Income Tax Act.
1. Eligibility and investment
All individuals can open a PPF account. An individual can also open an account on behalf of a minor.
A person cannot open more than one account in his or her name or even have a joint account. While NRIs are not allowed to open an account, if an individual becomes an NRI while the account is in operation, then he or she can continue to invest in the PPF account, on a non-repatriation basis.
The minimum amount of investment in a PPF account is Rs 500 per annum and the maximum amount of investment in a year is Rs 1,00,000 (w.e.f. 01st Dec, 2011).
In case of a minor's account, the investment in the minor's and guardian's account together cannot exceed Rs 1, 00,000 per annum.
Deposits can be made in a maximum of 12 installments in a year.
The PPF account comes with a lock-in period of 15 years which makes it a long term investment option. However, during the tenure of the account, you can take loans or withdraw amounts subject to certain conditions.
On completion of 15 years, you can extend the tenure of the account in a block of five years, indefinitely.
The limits on investment, tax exemptions and rate of interest remain the same even during the extension period.
3. Rate of interest
Earlier the rate of interest on PPF was fixed at 8 per cent per annum. This was from 2002 until November 2011, post which based on the recommendation of a Committee headed by deputy governor, RBI, the interest rates on various small savings schemes including PPF were linked to the yields on Central Government securities of comparable maturities.
Accordingly, the PPF rate is no longer fixed and can change every fiscal year.
The current rate for FY 2012-13 stands at 8.8 per cent per annum.
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.
4. Tax exemption
PPF is one of the few investment options which fall into the category of E-E-E (Exempt-Exempt-Exempt) mode of taxation. The s stand for the following:
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.
6 lesser-known facts about PPF
1. If you have not made 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. The account has a maturity of 15 years but in reality, it runs for a 16-year period. The year of deposit is considered as ZERO year and deposits can be made for 15 more years, which makes it 16 years in all.
3. 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.
4. It is possible to take a loan as well as make withdrawals from your PPF account, subject to certain conditions. While loans can be taken from 3rd to 6th year, one can start withdrawing from PPF account from 7thyear onwards.
5. 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.
6. A PPF account can be opened with a minimum deposit of Rs 500 in any of the branches of State Bank of India or branches of its associate banks. You can also make an online transfer from your bank account to your PPF account.
For the debt or fixed income part of your portfolio, PPF is a highly recommended option. The lock-in may work to your advantage if the PPF corpus is dedicated to fulfilling certain long-term goals. Since it's a government-backed scheme, there is no risk to the money. The E-E-E tax status adds to the advantage.
Money management solutions can help you track your PPF account. There are options to enter the details manually or if you have the online account credentials, it can be updated automatically. It would track the current balance, deposits history and show the interest rate applicable, all automated.
It also updates your account maturity and the amount of interest that would accumulate on maturity based on your deposits till date. It definitely proves much handier than flipping through the pages of your passbook.
The article was first published on REDIFF