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PPF (Public Provident Fund) has remained one of the popular investment alternatives, especially for risk-averse investors who are satisfied with moderate but guaranteed returns. Amidst the rising popularity of other investment platforms like mutual funds, PPF is most trusted because of sovereign guarantee from the government on the principal invested and interest earned.
Public Provident Fund (PPF) which allows us to save money on which no tax is levied. The government has retained the 8% interest rate on the popular PPF or Public Provident Fund (PPF) for the January to March quarter, making it an attractive investment for conservative investors. Apart from tax benefits, the PPF also helps build a sizeable corpus for long-term goals like retirement. In terms of income tax implications, the PPF has an EEE or ‘exempt, exempt, exempt’ status, meaning that it provides subscribers with deduction benefit up to ₹ 1.5 lakh under Section 80C on deposits and tax-free interest and returns. A PPF account allows the facility of partial withdrawal, loan and account extension beyond 15 years. However, despite its acclamation, many investors are not aware of the most important facts associated with the PPF account.
Currently, PPF offers 7.9% returns that are compounded annually. Basis the yields of government bonds, the Ministry of Finance reviews interest rate every financial quarter. Returns on PPF enjoys Exempt-Exempt-Exempt (EEE) tax status which means that the interest earned, proceeds gathered on maturity and investments are tax exempt under Section 80C of the I-T Act. This tax-free status gives PPF an advantage over 5 year-tax saving fixed deposit from banks and post office as their interest income is taxable as per the tax slab of the depositor.
An investor can hold a PPF account in his or her name or even open one in the name of a minor but together the contributions can’t exceed ₹ 1.5 lakh in a financial year. Deposits can be made in lump-sum or in 12 instalments.
The subscriber has to deposit a minimum of ₹ 500 a year. If the subscriber is opting for the monthly mode, it is advisable that he/she invest before the fifth of every month. For interest calculation, the balance is taken as the minimum between the fifth day of the month and end of the month. This means that if the subscriber deposits after the 5th of the month, then he/she loses out on a lot of interest income for that particular month.
Despite having a lock-in period of 15 years, the PPF account offers partial liquidity through partial withdrawals and even loans. However, availability of such benefits is subject to certain conditions depending upon the balance in PPF and number of years completed. The interest rate charged on loan is more than 2% of the interest earned on the scheme. The principal repaid amount is credited to the subscriber’s account and the interest paid on the loan is amassed to the government.
Nonetheless, from the 7th year onwards, as the holder becomes eligible to withdraw, then she is no longer allowed to borrow loans. Also, subscriber shall not be entitled to get a fresh loan until the earlier loan has been paid off along with the interest.
A PPF account matures after 15 years and a subscriber can retain the account after maturity without making any further contribution. The balance in the account continues to earn interest till it is closed. The subscriber can make one withdrawal of any amount in each financial year. However, if a subscriber wants to make further contributions after the PPF account matures, it can be extended in blocks of five years.
There is no limit on the number of times the subscriber can extend the PPF account. But the subscriber has to submit Form H within one year from the date of maturity of the account, if he or she wants to extend the account in the contribution mode
To be eligible for premature closure, you must have completed at least 5 financial years. However, you would be allowed premature closure only in case of the death of the holder, treatment of ailment or life-threatening diseases of the holder, spouse, parent, or children, or if the amount is required for higher education of the holder or minor account holder. You will be required to submit supporting documents from competent medical authority (in case of death or medical emergency) or fee bills for confirmation of admission from recognised institute of higher education in India or abroad.
Remember that premature closure is subject to penalty. You would receive 1% less interest rate than applicable interest rate, from the date of opening the account till the date of such premature closure.
According to PPF rules, the subscriber has to deposit a minimum of ₹ 500 a year; otherwise, the account becomes inactive. If the account remains dormant, the subscriber cannot make contributions. The subscriber also becomes ineligible for partial withdrawal or loan facilities. But the amount already deposited continues to earn interest and the subscriber can only withdraw full amount at maturity, which is 15 years after the account was opened. To reactivate an inactive PPF account, the subscriber has to visit the bank branch or post office where his account is held, and submit a written request. A penalty of ₹ 50 for each financial year is levied.
You can avail a loan against PPF from the 3rd financial year up to the 6th financial year to the extent of 25% of the amount deposited at the end of the second year immediately preceding the year in which the loan is applied. Loan is repayable either in one lumpsum or in two or more monthly instalments within a period of 3 years from the day the loan is sanctioned. After the repayment of the principal amount of the loan, you shall pay the interest in not more than 2 monthly instalments at a rate of 2% p.a. over and above the applicable PPF interest rate of the principal. The interest on the outstanding loan amount shall be charged at 6% p.a. over and above the applicable PPF interest rate, in case you are unable to repay the loan amount in full or in parts within 3 years.
Experts are of the opinion that one must invest in PPF before the fifth of every month, if opting for monthly contributions. This is advisable because, the balance amount taken for calculation of interest is considered as the minimum between the fifth day of the month and the end of the month.
In case a holder opts for lump sum annual investments, it is advisable to do it before April 5 of every financial year. Even though the interest is credited on March 31 of every financial year, it is calculated on a monthly basis using the minimum balance at the above-mentioned dates.
You can transfer your PPF account for various reasons like job transfer to another city or to get better services if you are not satisfied with your present account provider. To initiate the transfer, you need to visit your existing post office or bank and submit a transfer request. On receiving the request, the provider will provide the closure documents which are essential to transfer and open the PPF account with the new PPF account provider. To initiate a bank to bank PPF transfer opening a savings account with the new bank is a must. If you are an existing customer of the bank, then you can open the PPF account by submitting a fresh PPF account opening form, nomination form and the original PPF passbook of your previous PPF account provider.
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