Till date, the Public Provident Fund (PPF) scheme is the most popular investment in India. If you're looking for an exemption on the money you invest, interest that is non-taxable and a maturity amount that is exempt from tax as well, this is the instrument for you.
So it's no surprise that with these 3 very prominent benefits, almost every individual in the country has a PPF account and contributes to it religiously every year.
But do you really have total PPF knowledge? Are you aware of interest rate changes in the PPF over time? Do you know that this money can never be attached to any debt or liability i.e. it is yours forever?
There are many ways in which you can derive the maximum benefit from your PPF account. Let's see if you know everything you need to know about this incredible investment instrument.
Let's get straight to the facts...
1. PPF stands for Public Provident Fund - a government backed, long term, retirement savings instrument.
With a 15 year lock in, this is the longest horizon for an investment that exists in India. If you are keen on a safe investment, a decent rate of return, tax benefits (deduction and tax free interest) and have a long term investment horizon, then the PPF is for you. It is a disciplined investment avenue as your money is blocked for 15 years. PPF also offers loan against the account which can help you during occasions like a wedding in the family, further studies of your children, etc.
2. The main features are:
a) the 15 year lock in,
b) the E-E-E status (tax exemption on investment, interest and maturity) under Section 80C,
c) the minimum investment of Rs. 500 p.a. and maximum of Rs. 1 lakh p.a. (w.e.f 01-Dec-2011)
d) and the interest rate which currently stands at 8.8% for this fiscal year. The interest rate will be announced annually, it is no longer fixed at 8% p.a.
In fact, the PPF interest rate has steadily dropped over the years, and can be expected to slowly fall as the years proceed. Here's a look at what rates used to be in the hey-days of the PPF account:
Interest Rate p.a.
01 April 1986 - 14 Jan 2000
15 Jan 2000 - 28 Feb 2001
01 March 2001 - 28 Feb 2002
01 March 2002 - 28 Feb 2003
01 March 2002 - 30 Nov 2011
01 Dec 2011 - 31 March 2012
01 April 2012 till date
3. An NRI can't open a PPF account.
The rule of 25th July, 2003 states that 'Non Resident Indians are not eligible to open an account under the PPF Scheme'. However 'Provided that if a resident who subsequently becomes a Non Resident during the currency of the maturity period prescribed under the PPF scheme may continue to subscribe to the Fund till its maturity, on a Non Repatriation Basis.'
So if you open it as an RI, and during the 15 year tenure become an NRI, you can continue to invest, but on a non-repatriable basis.
4. You can make up to 12 investments in a year into your PPF account, in multiples of Rs. 5.
5. You can transfer your account from one 'Account Office' to another for example for convenience if you shift home.
6. The best time to invest is between the 1st and the 5th of any month, preferably April each year. Interest is calculated for the calendar month on the lowest balance at credit of your account, between the close of the 5th day and the end of the month, and is credited at the end of every year.
7. Regarding withdrawals from your PPF account, there are 3 things you need to know:
a) Any time after the expiry of the 5th year from the date that the initial subscription is made, you become eligible to withdraw an amount of not more than 50% of the previous year's balance or of the 4th year immediately preceding the year of withdrawal, whichever is less. If you have taken any loan on your PPF, this also gets factored in and reduces your balance.
b) You cannot make more than a single withdrawal in the year. you need to apply with Form C for any withdrawals.
c) Our PPF Calculator helps you see exactly how much you can withdraw from your PPF account and also how much loan you are eligible to avail, and in which years.
8. You can close your account or continue your account without deposits after maturity...
Any time after your account matures i.e. after the 15 year tenure is over, you can withdraw the entire balance using Form C. Interest will continue to be paid on your account and you will receive the total amount including interest up to the last month preceding the month in which you apply for a withdrawal.
9. You can even continue your account with deposits after maturity...
Few people know this, but the PPF account is indefinitely extendable. It has a 15 year lock in, but then you can extend it for periods of 5 years at a time, indefinitely. Your account continues to operate normally i.e. you make deposits of up to Rs. 1 lakh, earn interest and renew after 5 years if you wish. Everything remains E-E-E. To extend by a block of 5 years, use Form H.
10. You can withdraw, even if you choose to extend...
If you choose to extend by subscribing for a 5 year block, you can make partial withdrawals (using Form C again) of up to 60% of the amount standing at your credit at the beginning of this 5 year block period.
11. At any point in your life, you are allowed to have only 1 PPF account in your name.
You can also have an account in the name of a minor child of whom you are the parent / guardian. However that will be the child's account, you will simply be the guardian.
If at any time it is seen that you have more than 1 account in your own name, the second account will be deactivated, and only your principal will be returned to you.
12. If you choose to take a loan against your PPF account, you can repay it within 36 months from the 1st day of the month following the month in which the loan was sanctioned. So if your loan is sanctioned in June, 2012, the following month is July 2012, and you have until end July 2015 to repay your loan. The interest rate charged is 2% p.a.
There's a lot to know that can help you make the most of your PPF account. And if past rate changes are anything to go by, you can expect 8.80% interest to not last forever. As it stands today, the PPF remains E-E-E, so make the most of it to add to your retirement corpus. Click here to use the PPF Calculator and see how you can contribute to your own retirement corpus using this investment instrument.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.