Friday, August 5, 2011

Public Provident Fund: A Tax Effective and Safe Investment

PPF or Public Provident Fund is one of the most popular fixed income schemes in India and a scheme which investors who are risk averse and who have a high risk appetite – equally make full use of. In spite of being a very popular scheme and information being available on the PPF website, young investors are not fully aware of this investment option since there is very little advertisement and almost no ‘selling’ of this scheme by wealth advisors and retail banks (simply because they have no incentive to do so). This article seeks to comprehensively cover the salient features of a PPF scheme.

Where can you open a Public Provident Fund - PPF account?

Make a trip to your local post office. You can open it at any head post office or selection grade sub post offices. Visit the nationalized bank in your neighborhood. Selected branches of nationalized banks can also open accounts. Drop by a State Bank of India branch. SBI and its subsidiary banks also open accounts. I have heard that banks are sometimes reluctant to open PPF accounts because they get no additional money to handle these accounts and the money is credited to the RBI the same day. However I have not faced this problem.

Who can open a Public Provident Fund PPF account?

Anyone can open a PPF account, either on his/her own behalf or on behalf of a minor. Being part of a General Provident Fund or Employees’ Provident Fund scheme does not disqualify you from subscribing to the PPF, but at no point are you allowed to have two PPF accounts in your own name at the same time. Doing so will invite a penalty: if the issuing authority (bank or post office) detects two accounts during the tenure of the scheme, you will get only your principal back. Also, two adults cannot open a joint PPF account -- an account has to be opened singly, but can have one or more nominations.It's a good practice to open a separate account in the name of your spouse (or your minor children) and keep contributing to it -- you can even claim the tax benefit from the contribution made to accounts in your spouse's or minor children's names. In this way you could save tax-free funds even for your children and spouse. Consider opening a PPF account even if you are not a taxpayer, and keep it active. When you do become a taxpayer, you will have an account that will mature early. Remember, however, that any change in the interest rate will apply to you too, even if you've been maintaining an old account.

NRIs who wish to avail of rebate on their income in India are also eligible to open a PPF account. Subscriptions, however, will have to made from their NRO account on a non-repatriable basis.
When you open an account, you will be given a passbook in which all subscriptions, interest accrued, withdrawals and loans are recorded.

Term, Minimum Amount and Frequency of Installments to a PPF Account:

The term of a PPF account is 15 years. Even so, the effective period works out to 16 years because you are allowed to make your last contribution in the 16th financial year. Why should this interest you? - Because even if you make a contribution on the last day, you still get the tax rebate, although you won’t earn any interest on the amount.
During a financial year, you can contribute a minimum of Rs 500 and a maximum of Rs 70,000. If you are putting in money in installments, remember that you can't make more than 12 installments a year. There's more flexibility in the scheme: unlike a bank recurring deposit, you don't have to deposit the same amount every month.
Yes. Your account will become defunct if you don't deposit the required minimum of Rs 500 a year. The amounts already deposited will continue to earn interest, which will be paid to you at the end of the term (15 years), but you can't take loans or make withdrawals. You can revive your account by paying a fee of Rs 50 for each year that you default, along with subscription arrears of Rs 500 for each such year. And don't worry if your account is discontinued -- you will not be debarred from opening a new one.

Withdrawals and Loans from your Public Provident Fund - PPF account:

The entire credit balance in your PPF account is yours to withdraw when it matures -- at the end of 15 years. Meanwhile, you can make withdrawals within specified limits. The first withdrawal can be made from the seventh year. Subsequently, you can make one withdrawal every year. You can withdraw up to 50 per cent of the balance at the end of the fourth year or the year immediately preceding the withdrawal, whichever is lower.
You don't have to wait to withdraw from your PPF account to get some money from it -- you can get a loan on your PPF from the third year. You can get a loan equal to not more than 25 per cent of the balance in your PPF account. You can repay the loan in a maximum of 36 installments.
The interest on the loan amount is 1 per cent a year, but will be hiked to 6 per cent a year if the loan, or a part of it, remains unpaid even after 36 months. New loans are disbursed only after you pay up earlier loans. If you do decide to withdraw money -- after the seventh year, of course -- remember that you cannot take a loan in addition.

TAX Benefit s and other details:

The interest credited to your account, as well as withdrawals from it, are exempt from income tax. The balance held is fully exempt from wealth tax, without any limit. The balance in a PPF account cannot be attached under an order or decree of a court. What that means: if you're involved in a legal dispute, a court cannot attach or question the money in your PPF account -- as it can with your other personal property.

The money that you deposit in the Fund earns interest at a rate that the government fixes periodically. The interest rate is 8 per cent (currently), compounded annually. Interest is calculated for a calendar month on the lowest balance in your account between the close of the fifth day and the end of the month, and is credited to your account at the end of each year. So, to derive the maximum from your investment, put in your deposit in the first few days of a month. The monthly contributions will earn simple interest till the end of the financial year.

As a PPF account holder, you can nominate one or more persons. In the event of your death, the amount in your account will be paid to your nominee or legal heir even before the end of 15 years. However, if the balance is not withdrawn, it will continue to earn tax-free returns. It is advisable to open a savings account of the nominee or nominees in the same bank and mention this number in the PPF account opening form. Also, since a single cheque is issued in favor of all the nominees, it would be prudent for the nominees (in case of more than 1 nominee) to open a joint bank account. The account can be transferred to any scheduled bank or post office in India.

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