Are you shunning PPF for ELSS investment? Read this! - Outside View by PersonalFN

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Are you shunning PPF for ELSS investment? Read this!
Oct 9, 2014

As you may know, the Indian stock market is in an exuberant phase with new highs being scaled. And thus many equity oriented mutual funds have also multiplied wealth. Being influenced, you may be keen to invest in Equity Linked Savings Funds (ELSS) this year for tax planning purpose. But are you shunning Public Provident Fund (PPF) in the bargain?

Just to remind you, in the union budget 2014-15 finance minister Mr Arun Jaitley has extended a relief to the 'aam admi' who voted the Modi-led-NDA Government to power by a thumping majority. You see, apart from increasing the basic exemption limit for individuals, the deduction limit under section 80C of the Income-Tax Act, 1961 was also increased to Rs 1,50,000 (from Rs 1,00,000 earlier) and as a synchronisation to this move an enhancement to annual investment ceiling for PPF scheme was made to Rs 1,50,000 (from Rs 1,00,000 earlier).

So, you should be thinking again if you are considering utilising the entire limit under section 80C of the Income-Tax Act, 1961. It is perfectly fine to invest in ELSS; but while doing that, you shouldn't overlook other alternatives available for investment (under section 80C) in order to diversify wisely in the tax saving portfolio. You see, there is no point getting swayed by the exuberance of the Indian equity market, especially when the valuations seem stretched. You see, amongst the other investment avenues for tax saving under section 80C, the most popular one is PPF.

You may have a few most common excuses for not investing in PPF, such as...

  • PPF just earns 8.7% interest

  • Investments in PPF are to be held for longer; I don't want any such commitments

  • I already have made investments for 80C; I don't require a PPF account

  • I am repaying my home loan which takes care of my tax planning exercise; I don't need a PPF account etc.
But let's apprise you that investing in PPF is worthy for the benefit it offers and therefore you mustn't shun investing in a PPF account.

What is PFF?

PPF is a scheme of the Central Government, framed under the Public Provident Fund Act, 1968. Briefly, the PPF is a government backed, long term small savings scheme which was initially started by the Government as it wanted to provide retirement security to self-employed individuals and workers in the unorganized sector.

The main features of PPF are...

  • The 15 year lock- in,

  • E-E-E status (tax exemption on investment, interest and maturity) under Section 80C of the Income-Tax Act, 1961

  • Minimum investment of Rs 500 p.a. and maximum of Rs 1.5 lakh p.a.

  • The interest is paid annually on compounded basis. The rate currently stands at 8.7%. It is not static and may change every financial year

  • Your account cannot be attached for any debt or liability
Opening a PPF account and things to be kept in mind...

You can open a PPF account at your nearest State Bank of India branch, or a branch of any of State Bank's subsidiaries. You may also open an account in select nationalized banks, and the post office. All you need to do is: fill in the form, attach a photograph, state your Permanent Account Number (PAN)... and you're done. Once you complete the formalities, you will receive a pass book which will record all your PPF transactions.

But remember, at any point in your life you are allowed to have only 1 PPF account in your name. 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. But if you have a General provident Fund account, or an Employees Provident Fund account, you can still have a PPF account - there is no restriction. You can never hold a PPF account in joint names.

You may 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.

Making deposits into my PPF account...

Firstly, you can invest in multiples of Rs 5 with a minimum investment of Rs 500 per annum, and a maximum of Rs 1,50,000 per annum.

You don't need to invest all in one shot, you can invest into your PPF like an SIP, making up to 12 instalments in a year of different amounts, but not more than 12 investments in a year.

Your interest will be calculated on the minimum balance in your account between the 5th and the last day of every month, so if you were planning on investing into it monthly, make sure you invest (i.e. your PPF account is credited with the investment amount) on or before the 5th of every month.

Withdrawals from my PPF account...

Yes, you can make one withdrawal per year starting from your seventh year (through application vide Form C). The first withdrawal can be done after the expiry of 5 full financial years from the end of the year in which your initial subscription was made. This means that from the day you open your account, you will need to complete 6 full financial years before you can make any withdrawal. Thereafter, you can make one withdrawal per year.

The amount of withdrawal will be limited to 50% of the balance at credit at the end of the fourth year immediately preceding the year in which the amount is to be withdrawn, or the balance at the end of the preceding year, whichever is lower. Here, it is important to note that; if you have taken any loan on your PPF account (which is possible!) this also gets factored in and reduces your balance.

For example: if you opened your PPF account on April 1st, 2014, you can make your first withdrawal after April 1st 2020, and the amount of withdrawal will be limited to 50% of the balance as 31st March, 2016, or the balance on 31st March 2019, whichever is lower and subject to loan taken on your PPF account. Our PPF Calculator will be of great help for you to 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.

The withdrawal amount is not repayable.

Can I close my account premature?

Well, prematurely closing the PPF account is not permitted. However in case of a death, the nominee of the PPF account holder can close the account claiming the amount; but the nominee cannot transfer the account in his / her name.

Taking a loan against my PPF account...

Yes. You can take a loan from the fund in case of need; you need not wait till you can withdraw from the account. The first loan can be taken in the third year of opening the account i.e., if the account is opened during the year 2007-08, the first loan can be taken during the year 2009-2010. The loan amount will be restricted to 25% of the balance including interest for the year 2007-08 in the account as on 31/3/2008. The loan must be repaid in a maximum of 36 EMIs

You can take a second loan against your PPF account before the end of your sixth financial year, but your second loan can be taken only once your first loan is fully settled.

Repayment of loan is to be done 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 September, 2014, from the following month of October 2014 you repayment will begin and will go on until October 2017.

What are the options once the PPF account matures...

This is something a lot of investors do not know. They are under the impression that you can either close the account, or extend it for 2 blocks of 5 years each. But actually this is not correct. You have 3 choices.

Either you can withdraw your maturity amount, or you can extend your account by a 5 year block, as many times as you want and make fresh contributions, or you can extend the account without making any further contributions, and continue to earn 8.7% interest on it per annum. If you decide to withdraw your money, your maturity value is exempt from tax.

If you decide to extend your account and continue making fresh contributions, you can extend it for a block of 5 years at a time, as many times as you want, you can also make withdrawals from the account, up to 60% of the account balance that was there at the beginning of the extended period. Just remember, if you choose to extend your account, submit the necessary documentation for extension before one year passes from the maturity date.

If you choose to extend your account without making any fresh contributions, you can do so. In this case, any amount can be withdrawn without any restriction; however you can only withdraw once per year. The balance will continue to earn interest till it is withdrawn. On withdrawal, the PPF proceeds can be used to fund your life goals, such as your retirement, children's higher education or marriage and so on.

Can an NRI open a PPF account?

No. Only Indian citizens have the privilege of opening PPF account. However, those who become NRIs after opening an account are allowed to make contributions even after their residential status changes. It is to be noted that, in such cases, investments are made on non- repatriable basis.

PersonalFN is of the view that while investing in PPF it is very important for you as an investor to keep yourself updated on the latest PPF rules. The onus is on you as an investor to know the rules, not the bank official you deal with. So be a responsible investor. Also, as with any investment, there are risks attached. Interest rates going forward are uncertain, and in combination with the very long tenure of this instrument, it is advisable to diversify your fixed income portfolio.

PersonalFN is of the view that, instead of bothering about returns that you generate on a particular investment, you would be better-off identifying the role of an asset class in your portfolio. PPF is an excellent investment avenue that you may consider for your fixed income portfolio. PersonalFN believes asset allocation matters the most in the process of wealth creation.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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