PPF or Public Provident Fund is most popular tax saving tool. One of the main reason behind its popularity is that PPF is most tax efficient savings instrument therefore real returns are high. Moreover being a long term investment, it is very useful for Retirement Planning or achieving long term objectives like Child’s marriage or Education.
How to open PPF account
Earlier, only Post Offices were allowed to open PPF account but recently Govt allowed selected banks to open PPF account. Good news is that you can transfer your Public Provident Fund Account from Post Office to Bank & vice a versa. Unfortunately except SBI, all the branches of other banks are not allowed to offer PPF account. Only selected branches can open PPF account. Whereas in SBI, you may open PPF account in any branch so you will get wide reach in SBI. Banks allowed by Govt to open PPF Account are:
(b) ICICI Bank
(c) Associate Banks of SBI like State Bank of Mysore, State Bank of Patiala etc.
(d) Bank of Baroda
(e) Central Bank of India
(f) Indian Overseas Bank
(g) Union Bank of India
(h) IDBI Bank
(i) Vijaya Bank
Recently SBI & ICICI Bank launched online PPF account though not in true sense. You may apply for online PPF account through Net Banking facility of SBI & ICICI Bank. I will strongly recommend to open online PPF account with the bank with which you have savings account. It is very convenient as you can invest online through Net banking and can manage your account online. After a thorough research, I have decided to open online PPF account with SBI through Net Banking, i will share my experience with the readers shortly.
Another important point is that you can open only 1 PPF account & if you open 2 PPF Accounts then one of the account will be closed. Principal amount will be refunded & Interest accrued will be forfeited. Secondly, Joint PPF account is not possible. Parents can open PPF account in the name of a child being a guardian of the account.
You can open Public Provident Fund Account with min 100 Rs. In a financial year, you have to deposit min 500 Rs and max limit is 1,00,000 Rs. There is a penalty clause of Rs 50 (if min amount of Rs 500 is not deposited during FY). The account will be suspended if Min amount is not paid and you need to deposit penalty fees and arrears to reactivate the account. The cumulative interest will be calculated on 31st Mar for the financial year & will be credited to your account. You can invest lump sum or small amount on monthly basis but total no. transactions should not exceed 12 in a financial year.
Interest rate on PPF
Interest rate on Public Provident Fund Account is not fixed & is declared every year, it is linked to secondary market bond yields. The interest rate declared for FY 2013-14 is 8.7%. In layman terms, interest rates are linked to market rates. Secondly, it is advisable to invest in PPF Account between 1st and 5th of every month, if you would like to earn interest for that month. Any deposit between 6th to last day of the month will not earn interest for that month.
Subscription Period of Public Provident Fund Account
Public Provident Fund Account is opened for 15 years i.e. with 15 years lock in period. If you wish to extend the same after 15 years then it can be done in the blocks of 5 years each i.e. after 15 years you can extend for 5 more years and so on. Only “Individual” category subscribers can extend subscription period. HUF Public Provident Fund Account cannot be extended after 15 years. If you opt for extension after 15 years then anytime you can withdraw upto 60% of the balance at the start of 5 year block period and need to deposit min amount every year to keep the account active.
Another option is not to extend subscription period but maintain status quo i.e. don’t close or place request for extension of PPF account. You will continue to earn interest till account is closed and you can withdraw any amount any time after 15 years without any restriction but only 1 withdrawal is allowed during FY.
Premature Withdrawal
Major concern for Indian investors. Partial withdrawal is possible from 7th year onwards only once during the FY. The withdrawal amount should not exceed 50% of the closing balance at the end of immediate preceding year or 50% of the closing balance at the end of 4th year, whichever is lower. The complete amount can be withdrawn only after 15 years with an exception of unfortunate event of death of account holder (In such cases Nominee or legal heir cannot continue the account, it has to be closed mandatorily & amount is paid to the Nominee). Premature closure is not permitted.
You may also avail loan against Public Provident Fund Account from 3rd to 6th year only. The max loan amount can be 25% of the closing balance at the end of 2nd immediate preceding year i.e. if you are taking loan in 5th year then you can avail max loan of 25% of closing balance at the end of 3rd year. The loan should be repaid within 2 years and rate of interest will be 2% above the Interest rate declared for that FY. 2nd loan can be availed from 3rd to 6th year provided 1st loan is paid fully.
Tax Benefits of PPF
As i mentioned, PPF is highly tax efficient savings tool. It falls in EEE category i.e. Exempted at Investment Stage, Exempted at Accrual stage i.e. interest credited and also Exempted at the time of Withdrawal. Investment in PPF (subject to max limit of 1 Lac) is exempted under section 80C. The total interest earned is exempted from Income Tax at the time of accrual and withdrawal. PPF is exempted from Wealth Tax also. You can also claim tax benefit for the investments in the name of your spouse or child. To claim tax benefit it is mandatory for salaried class to provide Passbook photocopy.
I strongly recommend PPF account to my readers even if they are contributing to PF or EPFO. Some readers asked me that they have already exhausted 1 Lac limit under section 80C so is it advisable for them to invest in PPF. My answer is Yes, even if you are not getting tax benefit at Investment stage but at withdrawal stage interest is exempted from income tax & Rate of interest is very lucrative. Another common query is whether PPF account can be attached through court order in case of any debt/liability. Answer to this query is NO, the court cannot pass any order to attach PPF account of defaulter.
Just to summarize some of the key benefits of PPF before closing the topic
(a) Highly Tax Efficient
(b) Long Term Investment
(c) 100% Secured
(d) Rate of Interest linked to Bond Yields
(e) Flexibility to deposit on monthly basis
(f) Convenience of online deposit through Net Banking facility of SBI & ICICI Bank
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