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2020

Public Provident Fund Investment – Best of Both Worlds

Public Provident Fund Investment Best of Both Worlds

The Public Provident Fund is a savings-cum-tax-saving instrument in India, introduced by the National Savings Institute of the Ministry of Finance in 1968. The aim of the scheme is to mobilize small savings by offering an investment with reasonable returns combined with income tax benefits. The scheme is fully guaranteed by the Central Government. Balance in PPF account is not subject to attachment under any order or decree of court except the Income Tax & other Government authorities can attach the account for recovering tax dues.

Public Provident Fund (PPF) scheme is an ideal long term investment option for common people of India. It has various beneficial features like higher interest rate than FDs, tax free interest, tax benefits for investment u/s 80C etc. PPF offers option to invest any amount from Rs. 500 to Rs. 1,50,000 at any time during the year. Let us discuss important features of PPF in detail.

PPF Account:

In order to invest in PPF scheme one must open a PPF Account either with Post Office or a nationalized Bank (SBI, PNB, BOI etc.) or an authorized private bank (e.g. HDFC Bank, Axis Bank, ICICI etc.). Fill in prescribed Form along with KYC documents like identity proof, address proof and signature proof. Once a PPF account is open, one can invest by depositing money into the PPF account.

Rate of Interest:

The current interest rate is 7.9% (October 2019 onwards) which is compounded annually. The Finance Ministry sets the interest rate every year, which is paid on 31st March. The interest is calculated on the lowest balance between the close of the fifth day and last day or every month.

Important features of PPF:

  • Tenure: The PPF has a minimum tenure of 15 years, which can be extended in blocks of 5 years as per your wish.
  • Investment Limits: PPF allows a minimum investment of Rs 500 and a maximum of Rs 1.5 lakh for each financial year. Investments can be made in lump sum or in a maximum of 12 installments.
  • Opening Balance: The account can be opened with just Rs 500. Annual investments above Rs 1.5 lakh will not earn interest and will not be eligible for tax saving.
  • Deposit Frequency: Deposits into a PPF account has to be made at least once every year for 15 years.
  • Mode of Deposit: The deposit into a PPF account can be made either by way of cash, cheque, Demand Draft or through an online fund transfer.
  • Nomination: A PPF account holder can designate a nominee for his account either at the time of opening the account or subsequently.
  • Joint Accounts: A PPF account can be held only in the name of one individual. Opening an account in joint names is not allowed.
  • Risk Factor: Since PPF is backed by the Indian government, it offers guaranteed, risk-free return as well as complete capital protection. The element of risk involved in holding a PPF account is minimal.

Who can invest in PPF:

  • Any Indian citizen can invest in PPF. One citizen can have only one PPF account unless the second account is in the name of a minor. NRIs and HUFs are not eligible to open a PPF account.

Loan against PPF:

  • You can take a loan against your PPF account between the 3rd and 5th year.
  • The loan amount can be a maximum of 25% of the 2nd year immediately preceding the loan application year.
  • A second loan can be taken before the 6th year if the first loan is repaid fully.

Withdrawal:

  • As a rule, one can close a PPF account only upon maturity i.e. after the completion of 15 years.
  • Upon completion of 15 years, the entire amount standing to the credit of an account holder in the PPF account along with the accrued interest can be withdrawn freely and the account can be closed.
  • However, if account holders are in need of funds, and wish to withdraw before 15 years, the scheme permits partial withdrawals from year 7 i.e. on completing 6 years.
  • An account holder can withdraw prematurely, up to a maximum of 50% of the amount that is in the account at the end of the 4th year (preceding the year in which the amount is withdrawn or at the end of the preceding year, whichever is lower).
  • Further, withdrawals can be made only once in a financial year.

Procedure for Withdrawal from PPF:

In case you wish to partially or completely withdraw the balance in your PPF account, you can do so by submitting an application for withdrawal in Form C with the concerned branch of the bank where your PPF account is opened.

Form C has 3 sections:

1. Declaration section where you must provide your PPF account number and the amount of money you propose to withdraw. Along with that, you also need to mention how many years have actually passed since the account was first opened.

2. Office use section which comprises of details like:

  • Date when the PPF account was opened.
  • Total balance standing in the PPF account.
  • Date on which the previously requested withdrawal was allowed.
  • Total withdrawal amount available in the account.
  • The amount of money sanctioned for withdrawal.
  • Date and signature of the person in charge – usually the service manager.

 

3. Bank details section which asks for the details of the bank where the money is to be credited directly or the bank in whose favor the cheque or the demand draft is to be issued.

Note: It is also mandatory to enclose a copy of the PPF passbook along with this application.

PPF Account Closure Options on maturity:

Subscriber has 3 options once the maturity period is over.

1. Complete withdrawal.

2. Extend the PPF account with no contribution:

  • PPF account can be extended after the completion of 15 years, subscriber doesn't need to put any amount after the maturity.
  • This is the default option meaning if subscriber doesn't take any action within one year of his PPF account maturity this option activates automatically.
  • Any amount can be withdrawn from the PPF account if the option of extension with no contribution is chosen.
  • Only restriction is only one withdrawal is permitted in a financial year.
  • Rest of the amount keeps earning interest.

 

3. Extend the PPF Account with Contribution:

  • With this option subscriber can put money in his PPF account after extension.
  • If subscriber wants to choose this option then he needs to submit Form H in the bank where he is having a PPF account within one year from the date of maturity (before the completion of 16 years in PPF).
  • With this option subscriber can only withdraw maximum 60% of his PPF amount (amount which was there in the PPF account at the beginning of the extended period) within the entire 5 years block.
  • Every year only a single withdrawal is permitted.

Tax Benefits of PPF:

  • PPF is one investment vehicle that falls under the Exempt-Exempt-Exempt (EEE) category.
  • This, in other words, means that all deposits made in the PPF are deductible under Section 80C of the Income Tax Act.
  • Furthermore, the accumulated amount and interest is also to be exempt from tax at the time of withdrawal.
  • It is important to note that a PPF account cannot be closed before maturity.
  • A PPF account, however, can be transferred from one point of designation to another.
  • But, do remember that a PPF account cannot be closed prematurely.
  • Only in the case of the account holder’s demise can the nominee’s file for the closure of the account.
 

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