Public Provident Fund is safe as it is Government backed and also gives you tax savings. It is long term in nature and gives you decent returns, if you compare it with other options on a post tax basis.
Let’s look at some common and not-so-common aspects of PPF:
This is for the long term. Many individuals open a PPF account to meet long term goals like the higher education or marriage of children. This is a popular retirement savings option, especially for people who start investing a little late in life.
The present interest rate is 8.8% per annum and the income earned is tax free as well.
How is a PPF account opened?
A PPF account can be opened at the post office or in any of the specified banks. Certain public and private sector bank branches have been designated by the Government to act as collection centers for PPF accounts.
If you want a PPF account, you must first ascertain which bank and branch is authorized to open one for you. Then you must submit the required documents - account opening form, ID proof, address proof, two photographs and the pay-in slip with which you will be transferring the money to the account.
What is the investment and lock-in requirement?
The minimum and maximum investment amount in a year is Rs500 and Rs1 lakh respectively. This amount can be invested either annually or on a monthly basis. The tenure of a PPF is for 15 years.
How does one earn maximum interest on PPF?
Interest on PPF is calculated on the minimum balance between the 5th and last day of the month. So if you want to earn maximum interest on your deposits, you must invest before the 5th of every month. If you are making an annual investment, remember to invest your money before 5th April to earn the maximum interest.
How does one take a loan or withdrawal from PPF?
If you wish to take a loan on your PPF, you can do so only after one year and before five years from the end of initial investment year, by applying in Form D.
The maximum amount of loan that can be taken is 25% of the balance in the account as at the end of 2 years before the year of the loan application.
You can also withdraw from your PPF account instead of taking a loan. But this is permissible only after the expiry of 5 years from the end of the financial year in which the initial subscription is made. You can withdraw only once every year by using Form C
What happens if one does not invest in any year?
If you forget to invest in a year for whatever reason, the account becomes inactive. You will need to pay Rs50 as a fine for every year you have missed and also pay a minimum subscription of Rs500 for every year you have not invested. On making these payments, the account will get activated again, and will start earning interest.
What happens on maturity?
On the maturity of the 15 year tenure, you can either choose to close the account and withdraw the balance or you may continue with the account. If you choose to continue, you can extend it in blocks of 5 years.
What about PPF and NRIs?
NRIs cannot open a PPF account. However, if a person has a PPF account and subsequently becomes a NRI during the 15 year period, then this account can be continued. He can also continue to invest in the account till maturity on a non-repatriable basis.
Let’s talk about tax treatment?
PPF enjoys the EEE status on taxation, ie: Amounts invested are eligible for tax deduction under Sec 80C upto Rs1 lakh a year, interest earned every year is exempt from tax and maturity proceeds are also exempt from tax. The attractive tax treatment of this instrument is what makes it a popular option for long term savings.
What happens when the individual dies?
On death of the individual, the balance in the account (less any outstanding loans and interest on such loans) is paid to the nominee or the legal heir, as the case may be. This will be done even if the eventuality occurs before the completion of the 15 year tenure. The nominee will need to provide the death certificate and also proof of identity.