Today, on our tea time discussions with colleagues regarding PPF, ELSS, Tax Savings etc, I realized how our thinking and priorities change with age. Middle aged friends think about having a big house, a sedan 4 wheeler, getting married and growth in the organization. Elders have totally different approach and priorities. They are more concerned about their children’s marriage, building retirement corpus, and most important health aspects.
One of the topic for discussion was tax saving investments. The most common between us was PPF. For a very simple reason, everyone needs to save their money, and save tax. The young generation invests in PPF to save tax (they were forced by parents that it’s the best way to save tax ), and elders invest in PPF to save tax and build up the retirement corpus.
We had discussion on housing loan, ELSS, NPS, Old Pension Scheme etc but today it was turn of Public Provident Fund i.e. PPF.
PPF is backed by govt., undoubtedly in the safest hand
Its return efficient and beats the inflation.
Its is most tax efficient, as its Exempt-Exempt-Exempt category
What is PPF account?
Public Provident Fund is one of the most efficient investment and tax saving instrument.
With the focus to promote saving right from the grass root level, a instrument like PPF was much needed. So, govt introduced PPF in 1968, by govt of India, Ministry of Finance, to promote small savings. In turn inculcate the habit of saving money among people, specially of unorganized sector who do not have access to EPF/VPF.
Govt keep making PPF attractive, by tax exemptions on its investments, loan facility and early withdrawal facility. In general increase in 80C exemption limit is followed by increase in max contribution in PPF in a financial year.
Lets dive into details
Tax Saving Aspect
PPF falls in Exempt-Exempt-Exempt category.
- Tax exemptions upto Rs1.5 lacs under section 80C on deposits.
- No taxed for accumulated interest.
- No tax on withdrawal.
- Invest any time any amount starting from Rs100 (in multiple of 10) during the financial year based on funds availability, max 12 times a year.
- Encourages small savings: Account can be opened with amount as low as Rs100/- only.
- Best of Both Worlds: PPF offers risk free returns and beats inflation also. Govt. decides interest rates quarterly and keeps it a notch higher than the interest rates on 10 year govt bonds.
- Loan Facility: Loan on PPF deposits can be taken between 3rd to 6th year based on certain terms and conditions.
- Max contribution Rs1.5lacs in a financial year. Contribution upto 1.5lacs is fully exempted under section 80C of Income Tax Act.
Effective Tax Saving of approx, Rs7500 (for 5% tax slab), Rs30000(for 20%tax slab) or Rs60000(for 30% tax slab)
- Resident Indian above 18 years of age can open PPF account.
- Account in name of minors can be opened by the parents.
- NRI’s and Hindu Undivided Families cannot open PPF account.
- Resident Indian’s who became NRI after opening PPF account can hold the account till maturity.
Where to open PPF account?
- PPF account can be opened at selected branches of almost any nationalized bank, selected branches post offices. Private banks like ICICI, HDFC and AXIS bank also offer this facility.
- To open PPF account in any bank, it’s not mandatory to have saving banks account in it, but banks usually pressurize to open saving bank account before opening PPF account.
- PPF account can be opened online from respective banks official website.
- It is compulsory to deposit Rs500 in a financial year to keep account active.
Suggestion: Prefer opening account in banks rather than in post offices. Although post offices has more rural penetration, banks have online presence thus ease of transferring funds and doing other things.
- PPF account matures in 15years.
- On maturity either withdraw complete amount. or
- Within 1 year of maturity raise the request to extend it can further for blocks of 5years with contribution or without contribution.
- For extension without contribution, full amount can be withdrawn.
- For extension with contribution, only 60% of the amount at start of block period can be withdrawn anytime within the block.
- On maturity, all the money can be withdrawn and a new account can be opened.
PPF Account Required Documents
- Account opening form i.e. Form A (will be provided by bank/post office).
- Passport Size Photograph
- Address Proof
- Identity Proof
- Minimum payment for opening the account. (Rs500/-)
- Interest is calculated monthly basis and compounded annually. It is credited in the account at the end of financial year i.e. 31st march.
- Interest is calculated on basis of lowest balance on 5th day and end of month.
In general, whatever is the balance in your account at end of 5th day of month, interest will be calculated on that. (if you have not withdrawn any amount)
Note: Lowest is the keyword here. Assume, you deposited Rs20000/- on 3rd and Rs50000/- on 6th, you will get interest on Rs20000/- only for that month. But, if you withdraw Rs3000/- on 15th of the month, the interest for that month will be calculated on Rs17000/- only.
Tip: Invest before 5th of every month to get more interest on your investment. And preferably invest at start of financial year, so as to accrue maximum interest for complete year.
Note: Govt has decided interest Rate for 3rd quarter of 2018 for PPF as 8.0%.
Transfer of PPF Account
- Account can be transferred from one bank/post office to another.
- Account is non transferable i.e. it cannot be transferred from one person to another. Even, nominee also cannot continue a PPF account of a deceased person.
- Partial: 7th year on-wards, partial withdrawal is allowed based on certain terms and conditions. Withdrawal is possible only once a financial year.
- Complete: On maturity i.e. end of 15 years complete withdrawal is allowed.
- Extension Period: After maturity, during extension period withdrawal is allowed but only once a year. If extension is with contribution, max 60% amount (at the start of extension period) can be withdrawn. If extension is without contribution, complete amount can be withdrawn any time.
- Allowed only in certain cases like: higher education, serious ailments etc.
- Pre-condition: The account should have completed 5 years and penalty of 1% is charged for premature closure.
- Account gets discontinued if a minimum amount of Rs500/- is not deposited in a financial year.
- The penalty on discontinued account is Rs50/- per year.
- A discontinued account is revived on depositing atleast Rs500/- along with penalty amount.
- In case of death of subscriber, the nominee or legal heir will get the complete amount account even before maturity of PPF.
- Nominee or legal heir cannot fresh subscriptions in deceased person’s account.
- In legal matters; PPF account cannot be attached in decree of court. (imp)
If you deposit more than 1.5lacs in a financial year, at the first system should not accept that transaction.
No interest is given on extra amount over Rs1.5lacs in any case.
This is all about PPF one should know before investing. This is no risk investment avenue. I particularly prefer investing a small amount in PPF every month through automatic deductions from my savings bank account. I invest with a view to save tax as well as to build wealth in long term. To everyone who is new to savings and investments, I suggest they should start investing in PPF.
You can check more safe investment options for salaried persons in this post of mine.