Public Provident Fund (PPF) is an ideal vehicle for long term investment in debt category. It is an important retirement saving tool for individuals, more so for those who are not salaried employees. For salaried individuals, certain percentage of their salary, which is match by his / her employer, mandatorily gets invested in Employee Provident Fund. However, for other individuals such as businessmen, there is no such mandatory deduction from income. Hence it is important to have PPF as one of the investment vehicle for retirement savings.
Also read: EPF or PPF – Which one is better to invest?
Basic features of PPF:
PPF scheme is governed by The Public Provident Fund Act, 1968 and the scheme formulated thereunder. Any individual can open a PPF account for himself or on behalf of minor. NRIs are not eligible to open a PPF account.
One need to invest a minimum of Rs. 500 and can invest up to a maximum of Rs. 70,000 per annum in a PPF account. Maximum limit of Rs. 70,000 also takes into consideration investment in minor’s account. Interest is calculated on the lowest balance between the close of the fifth day and the end of the month and shall be credited to the account at the end of each year at the rate notified by the Government. Since March 2003, interest is paid @ 8% p.a. The tenure of the investment is 15 years; however the actual term is slightly higher (more on this below). The contribution to PPF is allowed as deduction under Section 80C of the Income Tax Act. Further, the maturity proceed along with interest is entirely tax free.
Tip: Since Section 80C allows you to claim deduction for your spouse as well as children, one can claim entire benefit of Section 80C up to Rs. 1,00,000 just by investing in PPF account, dividing the contribution between self, spouse and children.
Other important aspect of PPF investments:
While above are the basic features of PPF investment which everyone knows, one should also be aware about other important aspects. For eg: Are you aware that your PPF investment is protected against attachment under any decree or order of any court in respect of any debt or liability? This means that in case of any liability, the creditor or bank cannot recover the said amount from your PPF account. Further do you know that the actual tenure of PPF is more than 15 years? It can be anywhere from 16 years 1 day to 17 years depending on the date of opening the account. Let’s discuss such features in detail.
1. PPF funds are protected against attachment under any decree or order of any court in respect of any debt or liability.
2. One can make investment for maximum 12 times in a year.
3. In case, one fails to contribute minimum amount of Rs. 500 for a year or for few years, such default can be condoned by paying Rs. 50 per year of default along with contribution of Rs. 500 for each such defaulting year.
4. Partial withdrawal is permissible after five years from the end of the year initial investment was carried out. Such withdrawal is restricted to lowest of 50% of the following amount:
i. Balance outstanding at the end of the forth year immediately preceding the year of withdrawal or
ii. Balance outstanding at the end of preceding year.
For example: Let’s assume Year 1 is the year you opened the PPF account. You will be able to make partial withdrawal from Year 7 (i.e. after 5 years from the end of the year initial investment was carried out). The maximum amount permissible will be calculated as lower of 50% of:
i. Balance outstanding at the end of Year 3 or
ii. Balance outstanding at the end of Year 6.
However, only one withdrawal is allowed in a year.
5. PPF account can be close after the end of 15 years from the end of the year initial subscription was made. Hence the term of the PPF account can be anywhere from 16 years 1 day to 17 years. There is also an option to withdraw over a period of time. However, only 1 withdrawal can be made in a year.
Tip: It is advisable to open the account in the month of March, rather than in April. This way your term will be restricted to just little more than 16 years.
6. After the end of 15 years, it is possible to continue the PPF account. It can be done by submitting the prescribe form along with the contribution for that year before the end of 16th year. This continuation is for further block period of 5 years which can be further extended for another 5 years and so on. Withdrawals are possible provided that the total of all withdrawals shall not exceed 60% of the outstanding balance at the commencement of the said block period.
For example: Assume at the end of 15 years, you have Rs. 30,00,000 in your PPF account. In case you have opted for continuation for another block of 5 years, you can withdraw maximum of Rs. 18,00,000 (60% of Rs. 30,00,000) during the said 5 years.
7. One can avail loans on PPF investment. Technically loans can be availed from 3rd year but before the expiry of five years. Loan amount is capped at 25% of the balance outstanding at the end of second year immediately preceding the year in which loan is applied for.
For example: In case you wish to apply for loan in the Year 4, maximum you can apply for will be restricted to 25% of the amount outstanding at the end of Year 2.
Such loan has to be repaid within 36 months. This period is calculated from next calendar month. Repayment can either be lumpsum or by two or more installments. After principal repayment, interest has to be paid @ 1% in not more than two monthly installments. Thus the effective rate of interest is PPF rate + 1%. Interest is calculated for the period commencing from first day of month following the month in which loan is drawn till the last day of the month in which the last installment is paid.
Tip: Since the interest amount is fixed irrespective of the quantum and timing of principal repayment over the period of 36 months, it is advisable to pay the entire principal during the later period of 36 months. (Please correct me if I am wrong)
In case, loan is not repaid in full within above prescribed 36 months, interest rate on outstanding balance is charged @ 6% commencing from first day of month following the month in which loan was taken up to the last day of the month in which the last installment is paid.
8. One can make nomination for receipt of PPF balance in the event of the death of subscriber. However, trust cannot be a nominee. In case no nomination is carried out, then the legal heirs have to submit application for withdrawal of funds in Form G along with necessary supporting to prove their ownership. In such cases, the legal heir can withdraw upto Rs. 1 lakhs without any ownership proof, provided they sign the prescribed indemnity letter. For any amount above Rs. 1 lakhs, they need to submit the ownership proof.
Following are the links to various forms required for PPF Investments:
Form A | |
Form B | |
Form C | |
Form D | |
Form E | |
Form F | |
Form G | |
Form H |
Whether the above post on PPF useful? Where you aware of the unique provisions in PPF? Are you aware of any more tax planning tools in relation to PPF? Do share them below along with your comments.
WOW .. and I thought I knew about PPF .. This is very informative, Thank you so much ..
ReplyDeleteThanks a lot ....Awesome post..keep rocking n ATB..!!
ReplyDeleteThanks Rohit. Good you found it useful. :)
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