PPF (Public Provident Fund)
Under the PPF Act of 1968, Central Government made PPF scheme. This has been designed to provide retirement security for workers of unorganized sectors and self employed individuals. Below are the important factors of PPF.
- Eligibility Criteria: Should be individual Indian Resident.
- Entry Age: No age limit, minor can also open a PPF through guardian.
- Duration: 15 years (financial year, plus the first year of investment).
- Minimum Investment: Rs 500
- Maximum Investment: 80C Limit (at present 1.5 L)
- Maximum Frequency of investment in one year: 12 Instalments.
- Tax Benefits: Maximum limit under 80C and most importantly the interest earned at the time of maturity is tax free)
- Interest on investment: As per the declared interest rate compounded annually.
- Where can we open PPF account: Authorized bank branches and Post Office.
- Restriction: At any point of time one individual can have only one PPF a/c. If we open a PPF a/c for a minor (for example our child) & we are the guardian, then combining both the a/c the total amount should not cross the maximum limit (which is max of 80C).
- Other benefits:
- Tax benefits as mentioned above.
- PPF’s money cannot be claimed by any creditor to repay a debt.
Loan: We can take a loan from the fund. As per the PPF rule book, “Notwithstanding the provisions of paragraph 9, any time after the expiry of one year from the end of the year in which the initial subscription was made but before expiry of five years from the end of the year in which the initial subscription was made, a subscriber may, he so desires, apply in Form D or as near thereto as possible, together with his pass book to the Accounts Office for obtaining loan”. “A subscriber may, if he desires, apply in Form D or as near thereto as possible, together with his pass book to the Accounts Office for obtaining loan consisting of a sum of whole rupees not exceeding twenty five per cent of amount that stood to his credit at the end of the second year immediately preceding the year in which the loan is applied for.”
- We can also withdraw per year starting from the seventh year (through Form C). The withdraw amount will be limited to 50% of the balance at the end of the preceding year. If we have already taken a loan, then it will also get reflected and can reduce the amount.
How to withdraw PPF money at the time of maturity?
We need to close the PPF account at the time of maturity by filling Form C and along with the PPF Passbook.
Yes, at the time of applying for PPF a/c, we need to provide nominee details. In case of the a/c holder’s death, the PPF A/C will be closed and the PPF amount will be distributed as per the nomination details.
How to use PPF in our Financial planning?
PPF best suits for long term goal such as retirement, because of its features mentioned above. This is also best suitable product, as the tax benefits it provides. Below are few simple techniques we can follow to get the maximum benefits from PPF:
- If we are salaried person and have EPF, to get complete benefit of 80C, we can contribute (Maximum amount of 80C – (Total amount of our contribution towards PPF + any other tax saving instruments (such as life insurance) ). To get the 80C benefit, it has been seen that many people go for last moment investment and commit to unnecessary financial instrument for long time (such as ULIP). Remember, every year based on our increment in our salary, EPF contribution is also going to increase. Hence if we use PPF as one of our Tax saving instrument, we can adjust the remaining money for 80C investment.
- As we have 12 instalments per year to invest in PPF, we can predetermine how much money we are going to invest in PPF and can invest monthly. This will bring discipline in our saving habits.
- Interest is calculated based on the minimum balance in our account between 5th and last day of every month. Hence to get the interest benefit, we should plan to invest on or before 5th of every month.
- The day we come to know about PPF, it is better to open an account. Since minimum Rs. 500 needs to be invested per year, it is very easy to keep the account active. This way we can earn the number of years. In the later time, if we are near our long term goal and have some lump sum money and cannot put in any risk related instrument then we can invest that money in PPF and will get the tax benefit on interest at the time of maturity.
- If our long term goal is beyond 15 years, then we can extend our PPF a/c duration in a 5 years block as many times as we want. We need to fill Form H, within one year of maturity date. While extending the time period, we can choose fresh investment or without any fresh investment. We will get the compound interest benefit for any kind of extension. We can also withdraw up to 60% of the balance amount at the beginning of the extended period.
- If any point of time we forget to invest minimum amount (Rs 500) in PPF for one year or more, then the a/c will be deactivated. To reactivate, we need to pay a fine of Rs 50, along with minimum amount (Rs 500) for all the missing years.
Checklist while opening a PPF a/c.
- Make sure the branch where we are opening a PPF account is in the place where we are planning to stay after retirement. This will help us at the time of maturity and closing the account.
- If we have a saving account which has core banking and also eligible for PPF a/c, then it is better to apply for PPF account from the same bank. We can link both the account and can invest online to PPF in a click of a button.
- Make sure we include Nominee details while applying for PPF.