The recently revised interest rates on small savings schemes by the government which will fetch about 0.4% or more on various schemes from the current quarter (October-December), has once again brought the popular Public Provident Fund (PPF) into the limelight.
PPF, which was launched way back in 1968 still remains an attractive avenue of fixed income investment. As a scheme is backed by the Government of India, it offers safety along with an attractive rate of interest and returns fully exempted from tax. Let’s take a comprehensive look at the saving instrument to assess whether it is the right kind of investment for you!
- PPF is basically a long-term saving vehicle with a lock-in period of 15 years for the scheme. Thereafter, the subscriber can optionally extend it for 1 or more blocks of 5 years each through an application.
- Partial withdrawal up to 50% of the PPF balance is allowed 7 years after the expiry of the year in which the account is opened. However, it is suggested that one should check with the respective website of the bank to determine when the partial withdrawal is allowed. Some banks, such as ICICI and Axis, allow withdrawals after 5 years and some after 7 years (SBI and HDFC)
- You can also take a loan against your PPF balance, between the 3rd and 6th year from the date of account opening. Up to 25% of the PPF balance in the 2nd year preceding the year of withdrawal can be taken. The rate of interest on the loan is just two percent over the prevailing PPF rate if the repayment is done within three years failing which the interest rate rises sharply to six percent over the prevailing PPF rate of interest. So if the current PPF interest rate is 8% and you repay the loan within 3 years then the rate of interest charged would be 10%.
- A person can begin investing in the scheme with a minimum amount of Rs 500 and the maximum limit of Rs 1.5 lakh in a financial year in order to avail of the benefits of the PPF. You can invest money in the PPF up to 12 times in a year. These can be equal installments or unequal installments.
- You can open the PPF account in your own name or on the behalf of a minor but the limit of Rs 1.5 lakh is collectively applicable on all accounts. Non-resident individuals (NRIs), Hindu Undivided Families (HUF) and a Body of Individuals (BoI) cannot invest in PPF.
- PPF offers tax benefits as it comes under EEE (exempt-exempt-exempt) status which means that at the times of investment, the interest accrued and the proceeds received are exempted from the imposition of tax under section 80C of Income Tax Act.
- The scheme, after the recent increment by the central government of 40 basis points, offers an 8% rate of the return compounded annually. Suppose you are in a 30% tax bracket, then the effective rate of returns translates to about 10.4% if tax exemptions are taken into account.
- One of the lesser-known facts about the PPF is regarding the maturity date calculations. The rules of the PPF scheme mandate that the date of calculation for maturity must be taken from the end of the financial year in which the deposit was made. For example, if your first contribution to PPF is made on October 1, 2018, then the lock-in period would be calculated from March 31, 2019. So the maturity date would turn out to be April 1, 2034, in this case.
- You get interest on the lowest balance in your PPF account between the fifth and the last day of the month. Hence it is recommended that you should invest in PPF before the fifth of every month.
- In the case of one-time annual investments, one should deposit the contributions before April 5, of the financial year for the same reasons. For example, if you make your PPF deposit on the 10th of May, then your deposit would not be counted in for the interest calculation of that month (May) as the minimum balance between the fifth and the last day of the month is considered for the interest calculations.
- An individual can open a PPF account at any bank branch or post office. Also, the PPF accounts are transferable to any other branch of choice. Nomination facility is also available with the PPF account.