Public Provident Fund

Public Provident Fund…Did you know?

The Public Provident Fund (PPF) is one of the most popular savings vehicles in India. One of the reasons for this is the tax benefit it offers – it comes under the EEE (exempt-exempt-exempt) tax status. What this means is that at the time of investment, the interest earned, and proceeds received at maturity are all tax-exempt.

Here are some lesser-known facts about the PPF that can help you make a more informed investment decision:

  • PPF comes with a lock-in period of 15 years. As per the Public Provident Fund scheme rules, the date of calculation of maturity is taken from the end of the financial year in which the deposit was made. It does not matter in which month or date the account was opened. For example you made your first contribution in June 2014. The lock-in period of 15 years will be calculated from the March 31, 2015, and the year of maturity, in this case, will be April 1, 2030.
  • A minimum contribution of Rs.500 per annum and maximum of Rs 1.5 lakh per annum is allowed. You either make lump sum or monthly contributions, but it cannot exceed 12 in a financial year. Any contribution made above Rs.1.5 lakhs is not eligible to earn any interest.
  • As the lock-in period of the scheme starts from the end of the financial year in which the deposit was made, if you make an annual contribution you make a total of 16, and not 15, contributions during the tenure of the scheme.
  • It is recommended that one must invest in PPF before the fifth of every month in case of monthly contributions (in case of cheque, ensure that the payment to PPF is received). This is because the balance taken for calculation of interest is taken as the minimum between the fifth day of the month and end of the month. In case lump sum annual investments, it is advisable to do it before 5th April.
  • Only a resident individual can open a PPF account and joint ownership is not allowed. However, a minor is eligible to open a PPF account with a guardian. A guardian can either be the father or the mother (not both) or a court-appointed guardian. A grandfather or grandmother cannot open PPF account on behalf of their grandchild except in cases where both the parents have died.
  • Non-resident individuals (NRI), Hindu Undivided Families (HUF) or body of individuals (BoI) cannot invest in PPF. Recently, government notified that the day an individual becomes an NRI, the PPF account will be closed. The interest paid from that date till the closure of the account shall be equivalent to the post office savings account i.e., 4%, as against 7.8% earned by PPF.
  • Even though PPF has a lock in period of 15 years, it offers partial liquidity through loan and partial withdrawals. You can take a loan after 5 years and the interest rate charged on the loan is more than 2% of the interest earned on the scheme. From the 7th year as you become eligible for withdrawal, then you are not allowed to take a loan. Also, a subscriber shall not be entitled to get a fresh loan until the earlier loan has been paid off along with the interest. Only one withdrawal is permissible during the financial year.
  • Since PPF comes under the EEE status, any withdrawals made before the expiry of lock-in period is exempted from tax. However, you are required to declare that you have withdrawn from PPF while filing your income tax returns.
  • A PPF account cannot be attached by a person or entity to pay off any debt or liability. Further, even a court order or decree cannot make a person liable to pay off his debts using money from his PPF account.
  • If you don’t make atleast a minimum contribution, i.e. Rs 500, in a particular financial year, your PPF account will become inactive. To revive an inactive account, you will have to pay a penalty of Rs.50 per year for the number of years the account has been inactive along with a minimum contribution of Rs 500 per year.
  • If you discontinue your account, then you will not be eligible for loans and withdrawals until the account is revived by making a payment of penalty fees and minimum contributions. However, the account will be eligible to receive interest as per the prevailing rate.
  • After maturity, a subscriber has the option to extend the maturity period of the PPF account in a block of 5 years. The account can be extended for ‘N’ number of blocks of 5 years each. It will continue to earn the prevailing interest rate even if you do not make any contributions. However, this extension must be given within a year of maturity.
  • A person has the option to transfer his/her post office PPF account from post office to banks (authorized by the government) or vice versa.
  • PPF accounts are exempted from the ambit of wealth tax.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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