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Public Provident Fund (PPF) Account – Why should you invest in it ?

If you are looking for a long term investment option which is safe and with attractive returns that are fully exempted from Income Tax, then Public Provident Fund (PPF) is the best option for you.

It is a Government of India scheme for long term savings & tax savings.

1. Benefits of  PPF
•    Safe long term investment – for 15 years
•    Attractive returns which are fully exempt from Tax
•    Get 80C deduction for Investment amount (Maximum – Rs 1 lac)

2. Rate of Interest
The Rate of Interest is notified by government periodically based on prevailing market rates. Current interest rate effective from 01-Apr-2012 is 8.80% p.a compounded annually
Interest rates over time
•    01.04.1986 to 14.01.2000………………………… 14%
•    15.01.2000 to 28.02.2001……………………….. 11%
•    01.03.2001 to 28.02.2002 ………………………. 9.5%
•    01.03.2002 to 28.02.2003 ……………………….. 9%
•    01.03.2003 to 30.11.2011………………………… 8%
•    01.12.2011 to 31.03.2012………………………… 8.6%
•    01.04.2012 to onwards……………………………… 8.8%

3. Investment Amount
A minimum yearly deposit of Rs. 500 is required to open and maintain a PPF account. A maximum deposit of Rs. 1,00,000 can be made in a PPF account in any given financial year. The number of instalments in a financial year should not exceed 12.
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.

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.

4. Who can open PPF
Individuals who are residents of India are eligible to open a PPF account. It can also be opened on behalf of minor child.

Non-resident Indians (NRIs) are not eligible to open an account under the PPF Scheme. However, if a resident, who subsequently becomes a NRI may continue to subscribe to the fund until its maturity on a non-repatriation basis.

A person cannot open more than one account in his or her name or even have a joint account.

5. Investment Period
Minimum period is 15 years. However, during the tenure of the account, you can take loans or withdraw amounts subject to certain conditions.
The first year of investment is not counted for 15 years maturity. If you have opened the PPF a/c on 01 July’2000, then 15 years tenure will start from the end of FY 2000-2001 i.e. 31st March 2001. The maturity date in this case would be 31st March 2016.

6. Extension
After 15 years, it can be extended in block of 5 years for any number of blocks with or without contribution. You can extend it indefinitely.
Some bank/ postoffice officials are not aware fully about the rules of extension & inform the investors that they can extend PPF account only once for 5 years, but that’s not correct. You can extend the PPF account any number of times in block of 5 years.
To get an extension, you have to apply by filling “H” form within one year from the date of maturity of the account. The form is available at the bank or post office or even online.

7. PPF Withdrawal
On completion of 15 years, the full amount can be withdrawn.
If you have extended the PPF Account with fresh subscription, then you can withdraw up to 60% of the balance to his credit at the commencement of each extended period in one or more instalments but only once in a year
You can also withdraw money partially before the maturity.

8. Premature withdrawal (after 5 years)
Many people avoid this investment just because of the lock in period of 15 years. They are not aware of the premature withdrawal facility available. Partial withdrawals are allowed after the expiry of 5 financial years.
So, if you have opened a PPF account in Aug 2005, you can withdraw money after 5 financial years i.e account opened in FY 2005-2006, add 5 financial years which is 2010-2011.  Amount can be withdrawn in 2011-2012
You are allowed to withdraw once in a year. Also, withdrawal amount must not exceed 50% of the balance at the end of the fourth year, or 50% of the balance at the end of the immediate preceding year, whichever is less.

9. Loans (between 1 – 5 years)
After the expiry of one year but before the expiry of 5 years from the end of the year in which initial subscription was made, a loan of 25% of the credit balance at the end of the second year immediately preceding the year in which the loan is applied may be availed of by the subscriber.

10. 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.
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.
Amount in PPF account is also exempt from Wealth tax.

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