Public Provident Fund (PPF)

Provident Fund should not be a strange term for most of the readers. It has always been related as one of the safest forms of investment to fund the retirement of a person. Provident Fund which we all are familiar with is for the people who are in a job and a contribution is paid into PF by the employer and employee. You can read more about Provident Fund at Provident Fund (PF) – Best Investment Option Available for Salaried Employee. If you are not in job, then the equivalent for a PF is PPF – Public Provident Fund.

Top 6 benefits of investing into PPF are :

1. Highest Safety –  PPF is a debt oriented investment option which is backed by Goverment of India’s guarantee – highest level of security. Hence for those investors who do not want to take any risk on their investment amounts, PPF is one of the investments available at their disposal.
2. Fixed Returns – Unlike Equity markets, PPF provides a fixed and guaranteed interest rate income on your deposits. Hence irrespective of economic, political or any other factors, the returns on your funds shall not go below the guaranteed interest rates.
3. Tax Benefits – Any amount deposited in PPF account is eligible for a tax rebate under section 80C of Income Tax Act. Further, interest credited in PPF account is also tax free – Isn’t it double advantageous position ?
4. Low Yearly Amount – You can subscribe to a PPF account from as low as Rs. 500 per year. This makes PPF available at the disposal for most of the investors.
5. No Charges – Unlike most other investment options, there are no charges applied to your investments in a PPF account. Hence it gives you more out of your investments.
6. Safe from Any Decree – This is one of the most powerful benefits of a PPF account. It can not be attached under any order of court with respect to any debt or liability of the subscriber. Hence PPF is account is actually safeguarded from the unfortunate events whereby a subscriber may have incurred heavy debts / liabilities / losses.

 

Who can Open a PPF Account

PPF is classified as a small saving scheme and is restricted primarily to all resident Individuals. It is hence evident that body corporates can not open a PPF account as it defeats the motive of PPF scheme. You may also want to consider the following other groups who can invest into PPF :

• HUF : Until 13 May 2005, HUFs could also invest into PPF. However subsequent to that date HUF can no longer open fresh PPF accounts. Existing PPF accounts of HUFs shall not be renewed after the expiry of the initial duration of the PPF.
• Minor : Parents of a Minor can open a PPF account on behalf of a Minor and can deposit funds into Minor’s PPF account.
• NRIs : This is tricky. NRIs can not open a PPF account. However, if a resident who already has a PPF account and subsequently becomes a NRI, he can continue to invest into PPF till the initial duration (first 15 years) of the PPF expires. After that, the PPF account can not be renewed and would need to be liquidated. The investment into PPF would be on Non Repatriable basis only.

Minimum & Maximum Investment Amount

Minimum Amount– You need to deposit a minimum of Rs. 500 per year in a PPF account. If you do not deposit the minimum amount, then you would need to pay a fees of Rs. 50 for each year the minimum amount has not been deposited along with arrears. For example, if you paid in Rs. 400 in year 1, Rs. 200 in year 2 and Rs. 0 in third year. You would need to pay into your PPF account fees of Rs. 50 per year where you did not pay the minimum Rs. 500. In the example, you would have to pay Rs. 150 as fees. Additionally, you would have to deposit Rs. 100, Rs. 300 and Rs. 500 as arrears for year 1,2 & 3 as the amount deposited fell short of Rs. 500.

Maximum amount – which you can deposit in a PPF account is Rs. 100,000. The reason being, it is a small savings scheme and is not meant for rich people to enrich further by depositing large funds without paying tax on the interest on the funds.

 

Interest Rate on PPF account

Central Government specifies in the Official Gazette from time to time the Interest rate which shall be provided on the balances in PPF account. The interest is computed on lowest balance in the PPF account between 5th and end of the month. For example, if you had Rs. 3 lac in your PPF account on 1 Jan 2012 and you deposited Rs. 50K on 10th Jan. Your month end balance was Rs. 3.5 lac. You shall be provided interest on Rs. 3 lac for the month of January.

The interest amount is credited into the PPF account on an annual basis. Hence PPF interest is compounded on an annual basis. The current interest rate provided on PPF account is 8.8%. The historic rates provided on PPF accounts were :

• 01.04.1986 to 14.01.2000               12%
• 15.01.2000 to 28.02.2001               11%
• 01.03.2001 to 28.02.2002             9.5%
• 01.03.2002 to 28.02.2003               9%
• 01.03.2003 to 30.11.2011                 8%
• 01.12.2011 to 31.03.2012                 8.6%
• 01.04.2012 onwards                        8.8%

 

How to Open and Operate a PPF account

1. Visit any of the banks mentioned in this article and apply for a PPF account in Form A
2. The bank shall open PPF account and shall issue you a Passbook which shall contain an account of all deposits, interest credits, withdrawals & Loans.
3. If you want to deposit funds into your PPF account, go to the bank and deposit funds along with a challan in Form B
4. Amounts can be deposited in cash, cheque or via demand draft.
5. Deposit amounts should be in multiple of Rs. 5
6. You can deposit lump sum or multiple installments. However, maximum number of installments in a year can not be more than 12.

 

 Withdrawal of Funds

PPF account is meant to be a long term investment option and hence the rules on withdrawal are not as favourable as you may want them to me. Broadly, the following rules apply to withdrawal of funds invested into PPF account :

1. After expiry of 5 years from the date of opening of PPF account. The amount of withdrawal shall be 50% of the balance standing to the credit of the account at the end of 4 years preceding the date of withdrawal or at end of preceding year (which ever is lower).
2. Not more than 1 withdrawal can be made in a year.
3. After the expiry of 15 years duration when the PPF account gets matured and the entire funds can be withdrawn from the account.

 

Maturity & Extension of PPF Account

A PPF account has an initial maturity of 15 years. After 15 years, you have the following two options :

1. Encash the total maturity proceeds of the PPF accoun; OR

2. Within 1 year from date of expiry of 15 years, apply for continuing to deposit in the PPF account for further block period of 5 years. After the expiry of 5 years, you can continue to extend the duration of the PPF account by 5 years. There is no limit to the number of such extensions. For example, if you opened a PPF account in year 2000, then it would mature in year 2015. In year 2015 you would have an option to encash your PPF balance or to extend the maturity of PPF for 5 years upto 2020. This decision would have to be taken by you upto 2016 (within 1 year after maturity). After 2020, you can continue to extend your PPF account to years 2025, 2030 and so on.

 

Loans Against PPF balance

Though PPF is a long term investment it offers options to the investors to obtain the much required liquidity in the way of obtaining loan against PPF account balance. Specifically :

1. Subscriber to a PPF account and take a loan upto 25% of the balance which would need to be paid back within 36 months.

2. Interest payable on PPF Loan is 2% per annum (1% upto 2012). If the loan is not repaid back, the interest is charged at 6% per annum.

You may not rejoice by hearing these low interest rates. You are actually paying (PPF interest + 2%) as the balance. The reason behind it is two-fold. First you are not paid PPF interest on the amount which you have withdrawn as loan (hence 8.8% interest not paid). Second you end up paying 2% as interest. Hence the total interest paid by you is actually 10.8%.

 

Nomination

Just like all other financial instruments, it is vital that you register your nominee in your PPF account. For more details on it, you may want to refer to our article  Importance of Nomination.

• A subscriber can nominate one ore more people as nominees in his PPF account who can receive the funds lying to the credit of the PPF account after the death of the subscriber.
• This nomination can be cancelled / updated at any time by filing a fresh nomination request at the respective Bank.
• No nomination can be made in a Minor’s PPF account

If the subscriber of an account dies without registering a nominee, the funds lying to the credit of the PPF account shall be paid to the legal hiers. However, only an amount upto Rs. 1 lac shall be paid of the submission of (i) a letter of indemnity, (ii) an affidavit, (iii) a letter of disclaimer on affidavit, and (iv) a certificate of death of subscriber. You may note that if the amount if greater than Rs. 1 lac, the legal heirs would have to prove themselves as the LEGAL HEIR which in most cases require extensive court proceedings. Hence to avoid future hassles, it is always a good idea to have a nominee in your PPF account.

 

Appendix

List of Banks Offering PPF account facility:

• State Bank of India
• State Bank of Patiala
• State Bank of Bikaner & Jaipur
• State Bank of Travancore
• State Bank of Hyderabad
• State Bank of Mysore
• Andhra Bank
• Allahabad Bank
• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Canara Bank
• Central Bank of India
• Corporation Bank
• Dena Bank
• Indian Bank
• Indian Overseas Bank
• Punjab National Bank
• Syndicate Bank
• UCO Bank
• Union Bank of India
• United Bank of India
• Vijaya Bank
• IDBI Bank Ltd.
• ICICI Bank Ltd.

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