What is Public Provident Fund(Best Instrument to Save Tax and Earn Tax free Returns)

You must have heard the name of the Public Provident Fund(PPF) account for tax saving purpose. Perhaps all of you thinks that it is a good saving scheme. But due to less information and hassles of the PPF account, you may end up taking unnecessary insurance policy by the name of Investment.

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Information about Public Provident Fund:

Public Provident Fund Account Means – A portion of income is saved at the end of each month, which has not been spent anywhere. This part of the income is known as Savings.

Everyone’s thinking is different. There are some people who do not have the financial literacy to save as much money as they need for a month, then some people are a little sensible and they do not keep cash at home, and they invest into safe instruments like Savings Account, Fixed Deposit, and Recurring Deposit, etc.

There are some people who want earn decent interest on their saving for each month, they invest their saved money in the Monthly Income Scheme and there are some people who want to take that additional risk, and they want to increase their wealth by investing in Risky Instruments such as Mutual Fund, Equity Fund, and Debt Fund, etc to earn as much Interest as they can.

There are several ways to invest remaining surplus at the end of each month, one of them is to Invest the Public Provident Fund Scheme.

 

What is Public Provident Fund?

PPF i.e. Public Provident Fund; This is a savings scheme provided by the Indian government to its citizens, which is kept in the Triple E category (E-E-E: Exempt-Exempt-Exempt). That is, from the beginning to the end, you will never have to pay any tax on any money deposited.

In 1968, the Government of India had established the Public Provident Fund. The objective was that for the employees of the unorganized sector, there was no facility of EPF, Pension, etc. By introducing the PPF scheme, they can save money for their future.

To encourage more and more people to adopt this scheme, the government has kept the PPF free from all taxes. Not only did the tax exemption under section 80C on PPF deposits. The plan is quite popular right now. People invest in PPF due to tax saving benefit and to earn decent interest rates.

 

Features of Public Provident Fund:

  • PPF Account can be opened in any Post Office. Even a PPF account can be opened in the government / public sector such as SBI, PNB or Private Sectors such as ICICI, Axis Bank, etc.
  • One Can deposit up to a maximum of Rs 1,50,000 in every financial year and up to Minimum 500 rupees.
  • In this scheme, Investor can deposit Funds to earn a decent return on their investment till a fixed time period.
  • Since the PPF Scheme is a government scheme. Therefore, there is no risk of non-payment. That is, your savings are completely secured.
  • You can either invest a Lump sum or small Installments every single month. But you cannot make a deposit more than 12 times in a financial year.
  • You cannot open a new PPF Account Open until your first PPF Account is expired.
  • PPF Account can be opened only individually. Joint PPF Account cannot be opened.
  • PPF Account can be opened by both Cash or Cheque, but when Account is opened by Cheque, then on the day of the cheque realization in Government Account, the same date will be the Date of Account Opening.
  • Nomination facility is also available in PPF Accounts like all other accounts such as Saving Account, Monthly Income Scheme Account, RD Account or Time Deposit Account, which you can take when you open the account or any time during the maturity of the PPF Account. A nominee can be changed by PPF Account holder at any time.
  • A PPF account opened in the post office or bank of any city in India and can also be transferred to a post office or bank in another city.
  • When your PPF Account is matured and you want to extend it without closing it, you can extend it for 5 years within the maturity period.
  • Whatever interest you earn in this scheme is completely tax-free and at the same time, the maturity amount is also completely tax-free.
  • You have the authority to withdraw money annually from the 7th Financial Year from the date of Account Opening.
  • You can also take PPF Account Against Loan. You can take a loan facility from the 3rd year from the date of Account Opening.
  • However, NRI people are not Eligible to invest in this scheme. But if a person has invested in this scheme and after that he/she has become an NRI then that person can continue to fund his/her account till maturity. or if someone has extended the account to maturity after 5 years and afterward became an NRI person. In that case, the account can be kept continuously until the 5 Years Extension Block expires. After the account is matured, the Deposits are deposited in the account without any interest.
  • If the account holder has become an NRI even before the maturity period of 15 years, then such account cannot be extended on maturity and for 5 years.
  • Only one PPF Account can be opened by a person. This means that Multiple PPF Account is not Allowed. In the case of Multiple Account, only interest will be given on First Account, no interest will be payable on other accounts, and all accounts are merged with the first PPF account.
  • Investing in this scheme on behalf of an Individual Person, HUF (Hindi Undivided Family) or Association of Person (AOP) is not allowed.
  • It is mandatory to deposit at least 500 rupees in each financial year in this scheme, otherwise, it is necessary to pay 50 rupees as a Penalty.
  • You can get Parents to open Account for a Minor. Both parents cannot have a separate PPF Account Open on the name of Same Minor Child and Grand Parents cannot even open PPF Account on the name of their Grand Minor Child.
  • Annually, Compound Interest is Calculated in this scheme and it is credited to Account on 31st March.
  • One important thing is that not only Salaried Person or Employees can open the account, but anyone can open a PPF Account.

 

Eligibility and Investment Limit of Public Provident Fund:

The best part about PPF is that every citizen of the country can open a PPF Account. Whether you are a serviceman, a businessman or a farmer. Even there is no restriction on age limit. You can also open PPF Account for your child or under-age acquaintance.

But, keep in mind that you can only open one PPF Account on your name. If you have opened a PPF account in advance, you cannot open an additional account or associate a joint account with anyone.

You can not open another account at any time in your lifetime. If ever you are found guilty of opening another PPF account on your name, then the second account will be immediately deactivated. There will be no interest on the deposit amount in that account.

 

Premature Withdraw Rules from PPF Account:

The maturity period of the PPF account is 15 years and one can continue to deposit surplus in the PPF account until the PPF account is matured.

But it is not necessary that you can withdraw Deposit Amount in your account only when your PPF account is matured, but in case of a crisis, you can also withdraw 50% of the Deposited Amount.

Note: But Premature Withdrawal can also be done if your PPF Account has been open for 7 years.

 

NRI Cannot Open PPF Account:

NRI, that is, NRIs do not have the facility of opening a PPF account. However, if you had opened a PPF account while having a citizen of India then you can continue it till its tenure (15 years) is fulfilled.

According to the new rule of PPF for NRI, you can immediately withdraw all the money from this account as soon as 15 years of the account is completed.

 

Premature Closure Rules of PPF Account:

Premature closure can be done only when PPF account holder dies. In this situation, as soon as the PPF account holder dies, the total deposited amount with interest is deposited to the account of the Nominee.

 

Minimum and Maximum Investment Limit:

You can invest a minimum of Rs 500 or a maximum of one and a half lakhs in a PPF, during a financial year. Even if the PPF is being opened in the name of a child or a minor, then even that minor person and his guardian can not invest more than Rs 1.5 lakh in the joint account. You can deposit money only in your PPF account for more than 12 times a year. You can also deposit twice a month in PPF account, but should not be more than 12 times in a year.

 

Lock-In period of a PPF account:

PPF account is valid for 15 years. That is, you have to deposit money every month for 15 consecutive years. During this period, you can not withdraw money in normal situations. Yes, the loan can definitely be taken on the basis of deposit. The money can be withdrawn on account of the death of the account holder or in certain situations which will be discussed later.

You can increase your PPF Account for the next 5 years after completion of 15 years. After that, the account can continue to earn interest for the next five years. This cycle can last a lifetime. During this extended period, the rules of investment, tax exemptions and rate of interest, etc. will be applicable as before.

Before maturity, you have the facility to increase the duration of the account for five years. You can extend the validity of PPF Account by a block of 5 years by as many times as you want as there are no limits on a number of times you can extend your PPF Account.

 

Rate of interest in PPF Account:

At present, the government pays 8% interest on your PPF account. This interest rate is reviewed every three months. But interest in your account only adds once a year.

 

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In fact, the interest in the PPF account is calculated on 31st March. Only then does it add to the balance of the PPF account. That is, the PPF account is an annual compounding.

 

Tax benefits of Investment in PPF Account:

PPF is a scheme related to your social security and the government wants to promote it. Therefore, the government offers a number of tax benefits on this plan.

  1. Under Section 80C you add money every year to the PPF account and not even a single penny will be taxed. In this way, PPF gives you the benefit of tax deduction. Under this rule, you can get tax exemption on deposits up to a maximum of Rs 1.5 lakh each year.
  2. You get interested every year on the deposit in PPF account. But this interest is not added to your annual taxable income. I.e. interest on PPF is tax-free. On the other hand, the Fixed Deposit interest is taxable.
  3. When PPF account is maturing, whenever you withdraw money, it is completely tax-free. This money can be in millions. But it will not be taxed.

 

Returns on Investment in PPF Account:

At present, the government is paying 8 percent interest on PPF. These interest rates are expected to go up in the near future. Because of tax exemption and decent 8% interest, you can easily overcome inflation. For example, the inflation rate for RBI’s March 2018 was 5 percent. That is, investing in PPF was at least 3% better even in the downfall.

In 2018, most government banks have around 7% interest on long-term FDs (without tax). Here also the PPF is giving comparatively 1% more returns which completely exempted from tax.

You can take a loan from the bank or financial institution on the basis of deposits in your PPF. This will be only 2% more than the interest you get on PPF. By doing so, you pay 10% interest on your personal loan.

 

Where Can One Open a PPF Account?

 You can choose any of the following options to open a PF account.

  1. You can open a PPF account in SBI. Its associate banks also have facilities.
  2. PPF account opening facility is available in selected branches of some Nationalized Banks.
  3. PPF Account can be opened in selected Post Offices.

You will have to submit a PPF Account Opening Form in order to get a PPF account open physically in the Post Office or Bank. You can get this form by visiting the post office or bank branch or by downloading online. With this form, the account holder must be Attached \ the ID Proof, Address Proof, and a Photograph.

  •  Once your PPF account opens, a passbook is issued the way you get a passbook when you open a Bank account. In this passbook, the transactions that you have done in the PPF account i.e. Credit or Withdrawal can be printed the same way as you do on Passbook of Bank Account. The passbook is required when you want to claim for tax benefits/deductions under Section 80C of Income Tax Act, 1961 for your PPF.
  • The PPF Account can also be opened by visiting the Bank’s Official Website. By opening an online account, all the hassles of Offline Account opening can be saved.

 

Documents Required for Opening PPF Account :

  • Account Opening Form. Account Opening Form (Form A)
  • Passport Size Photograph | Passport size photograph
  • Valid identity card | ID proof: Copy of PAN card / Voter ID / Aadhaar ETC
  • Residence proof Residence proof: Passport / Electricity Bill / Ration card / Bank Passbook etc.

 

When is the best Time to Deposit Money into PPF Account?

It would be better if you deposit money in your PPF Account between 1st and 5th of the month. This is because the bank pays interest for that month in the middle of your date of 5th and month, which is the minimum amount in your account.

Let’s Assume Interest of 8 percent throughout the Financial year 2019-2020

Important Points:

Interest for a particular month will be calculated as (Minimum Balance *8)/12

Where 12=Total months in a Financial year

The Interest earned every single month is compounded only at the at of the financial year.

Below is the full calculation of interest earned throughout the year.

 

MonthDepositMinimum Balance deposited before 5th of every monthInterestMinimum Balance deposited after 5th of every monthInterestDifference
April10000100006666.66666706666.666667
May100002000013333.33333100006666.6666676666.666667
June1000030000200002000013333.333336666.666667
July100004000026666.6666730000200006666.666667
August100005000033333.333334000026666.666676666.666667
September1000060000400005000033333.333336666.666667
October100007000046666.6666760000400006666.666667
November100008000053333.333337000046666.666676666.666667
December1000090000600008000053333.333336666.666667
January1000010000066666.6666790000600006666.666667
February1000011000073333.3333310000066666.666676666.666667
March100001200008000011000073333.333336666.666667
Total12000078000052000066000044000080000

 

How much money do you lose?

So from the above Example, one stands to lose Rs.80000 interest per year just by failing to make the deposit before 5th of Every month.

If you do not deposit money in your PPF account during the entire year, then your account will be suspended. However, in the next year, if you deposit the minimum amount of 500 rupees and 50 rupees as a penalty charge, your account will be reactivated once again.

 

How Many PPF Account Can Be Opened in a Family?

Two guardians cannot open separate accounts in the name of a child or minor.

Suppose you have two children; you can all open up to four accounts. two on husbands and wives’ names, and two with the names of both children’s, as a guardian.

Suppose you have opened a PPF account for yourself and for both of your children. In such a situation, the total deposit amount in these three accounts should not exceed Rs. 1.5 lakhs.

PPF Account cannot be opened as a Hindu Undivided Family (HUF). This facility has been discontinued from May 13, 2005. But if your account is opened earlier, this facility will continue till maturity for them. The HUF accounts cannot be extended after 15 years of maturity.

 

 Loan Against PPF Account:

You can take a loan up to 25% percent of the balance amount in the last financial year.

For example, depending on your PPF account you want to take a loan in July 2018. Your account had deposited 80,000 rupees till March 2018. Your balance is currently 86 thousand by June 2018. According to the rules, you can get a loan up to Rs 20,000 on the basis of the last balance of 80,000 of the last financial year 2017-18. During the year 2018-19, if you apply for a loan, then you will be able to get the loan of 20,000 only.

 

Important Things to Know Before Taking Loan Against PPF Account:

Your account should have a deposit of at least 500 rupees per year on a regular basis. You can not get a loan if this does not happen. Yes, if you have deposited a minimum amount of 500 rupees in the last year with a penalty, then you are eligible for the loan.

You can not apply for a loan against PPF account twice in the same year. Unless your last loan is completed, you can not apply for a new loan.

Even if you paid the loan in three months during any financial year, you will not get a new loan until the end of that fiscal year. After that, you will be able to apply for a loan in the next financial year.

On PPF Loan, you have to pay 2 percent more interest than the interest you get in your account. Just as you are getting 8 percent interest on your account, you will have to pay 10 percent interest on your loan.

You have to repay the loan taken on PPF within 36 months. You can do this in the form of a lump sum or in as an installment. If you do not pay the loan in this period, then in the next financial year you will be charged 6% instead of 2%.

 

Frequently asked questions about the Public Provident Fund :

 

1. Can I withdraw money from PPF Account before 15 years?

Yes, you can withdraw money from PPF Account but only after 7 years onwards.

Let’s see with the help of an example.

If the account was opened in July 2014, you can withdraw some amount from your PPF account from 1 April 2020.

You can get up to 50% of the PPF account balance from March 1, 2021, to 31 March 2022.

After 15 years the rules become easy. If you have chosen an extension with a contribution, you can withdraw 60% of the deposit amount of PPF during the next five years at maturity.

If you have chosen the extension without contribution, then there is no obligation to withdraw money. If you want, you can take out all the money.

  1. Can I take a loan against PPF Account?

Yes, you can take a loan from the third year after opening a PPF account till the sixth year.

You will not be able to take a loan after the sixth year. Because after six years you can withdraw money from your PPF account (partial withdrawal permission from 7th year).

  1. How much tax benefit I Can get from Investing in PPF?

You can’t claim more than 1.5 lacs rupees per year from PPF Investment.

 

Conclusion:

PPF is the safest form of an Investment which gives you a guaranteed return of 8% which comes with zero tax. PPF is the best form of investment for anyone who is scared of ups and downs of the Equity market and does not want to take any risk.

 

 

 

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