Why Investing in PPF makes sense.

PPF Account is widely known in India and a lot of people investment in PPF. But what is PPF and what are the benefits of investing in this form of Instrument? This article is an attempt to answer the questions which often usually crop up in our minds when thinking about PPF.

What is PPF?

PPF Account is the acronym for Public Provident Fund Account. It is a Long Term Debt Scheme of the Govt. of India on which regular interest is paid. Any Individual in India can invest in this scheme and can earn a handsome tax-free return on the same which is usually higher than the return offered by Banks on Fixed Deposits. PPF can be opened in any Post Office and in a few authorized branches of Banks.

Who can invest in PPF?

Any Individual in India can invest in this scheme. It can also be opened on behalf of a minor either by father or mother. Grand Parents cannot open PPF Account on behalf of a minor. However, in case of death of both the parents, the grand parents can act as a guardian of the minor and open an account.

HUF’s are not allowed to invest in PPF, but if any HUF had opened a Public Provident Fund Account prior to 13th May 2005, they would be allowed to continue and would be closed on expiry of 15 years from the date of opening the account.

How much to invest in PPF each year?

PPF, governed by the Public Provident Fund Scheme framed by the Govt. of India, specifies that the maximum amount that can be deposited in a PPF Account every year is Rs. 1,00,000 and the minimum amount to be invested in this account every year is Rs. 500. This amount may be paid in 12 monthly installments or in lump-sum at the option of the Account Holder. If a PPF Account Holder does not deposit Rs. 500 every year in his account, a penalty of Rs. 50 each year would be levied along with the arrears of subscription of Rs. 500 for each such year.

What is the PPF Interest Rate?

The PPF Interest Rates are benchmarked against the 10-year Government Bond Yield and is 0.25% higher than the average Govt. Bond Yield. PPF Interest Rates are announced every year by the RBI in the month of March for the upcoming Financial Year. The PPF Interest Rate as announced by RBI for the year 2013-14 is 8.7%.

PPF Interest is computed for a calendar month on the basis of the lowest balance in an account between the close of the 5th day and the end of the month but the interest is credited only at the end of the financial year.

What is the tenure of PPF?

PPF in India can be closed at any time after the expiry of 15 years from the date on which it was opened. The whole amount in this account can be withdrawn at the time of Closure. For Closure of account, the account holder shall apply in ‘Form C’ and furnish the Pass Book of his PPF Account. However, on the expiry of 15 years, the Account holder can also apply for extension of duration for a further time period of 5 years. In case an account holder opts for extension of PPF account, he shall also be eligible for partial withdrawal, subject to the certain conditions.

You can do only one withdrawal starting anytime from the sixth year, no withdrawals are allowed before the sixth year. You can withdraw only 50% of the lower of:

Ø the balance at the end of the fourth year, preceding the year in which the amount is withdrawn  OR

Ø the balance at the end of the preceding year

Can loans be taken on PPF Account?

The answer is YES, A loan can be taken from the third year of opening you account and only till the sixth year. So if you opened an account in 2011-2012, the year in which you can take the loan will be 2013-2014. The amount of loan you take can be only 25% of the account balance that exists at the end of the first financial year. Interest Rate is 1% if repaid within 36 months and at 6% on the outstanding loan after 36 months. The repayment may be made either in lump-sum or in installments.

 

What are the Tax Benefits of Investing in PPF?

Now let’s come to the most important benefit of investing in PPF – the Tax Benefits.

1.     Tax benefit on the Principal component: The amount deposited in this account can be claimed as a deduction (under section 80C) from the Gross Total Income. The maximum amount that can be claimed as a deduction under section 80C is Rs. 1,00,000 p.a.

2.     Tax benefit on the Interest component: The interest earned on PPF Account is also exempted from the levy of income tax. In other words, the interest income is also tax free.

Are there any other Benefits of investing in PPF?

The other chief benefits of investing in PPF are listed below:

Ø There is hardly any risk attached with the PPF.

Ø You get the convenience of investing lower amounts as and when you have the money. 12 contributions can be made in one year.

Ø The PPF cannot be attached via a court order in case of insolvency or bankruptcy.

Ø Nomination can be made in one or more names. On death of PPF account holder, the nominees cannot keep on contributing on the name of the deceased person.