The key to wealth creation lies in the practise of saving regularly and systematically. The Public Provident Fund (or the PPF) is one such long-term investment option that would suit investors of all types. Scoring high on safety, by virtue of it being government backed, this wonderful option comes with tax benefits, loan options and a low maintenance cost. Investment Yogi explains 7 must knows of a PPF, to make them more profitable for you.
1. It requires just Rs. 100 to start a PPF account
PPF accounts could be opened by individuals, whether salaried or self employed, with a minimum initial deposit of just Rs. 100. Accounts could be opened at any branch of the State Bank of India (SBI) or branches of its associated banks. Other nationalised banks which offer this service are Bank of India, Central Bank of India and Bank of Baroda. The general post office too allows opening of a PPF account. Individuals may also open a PPF account on behalf of a minor child of whom he is the guardian.
2. PPF accounts have a minimum and maximum deposit limit
A minimum deposit of Rs. 500 must be made during one whole financial year. The maximum that could be deposited is Rs. 70,000 in a financial year. Deposits could be in either one go, or in flexible instalments (in multiples of Rs. 10). You could vary the amount and the number of instalments, as per your convenience, provided you do not exceed 12 instalments in one financial year.
Failing to deposit the minimum requirement, would lead to your account being discontinued. Interest would however continue to accrue. You could regularize the account again on paying the prescribed default fee along with subscription arrears.
3. Interest calculation in PPF account
The interest rate in your PPF account is calculated on the lowest balance between the fifth and the last day of the month. So to maximise your earnings, try making deposits between the 1st and the 5th of the month. Interest is compounded annually and credited on 31st of March each year.
4. Premature withdrawal from PPF
The entire amount in your account could be withdrawn only on maturity. However, in times of financial crises partial withdrawals are permitted subject to certain ceiling limits. You could withdraw once a year, from the 7th year onwards. Such withdrawals, must not exceed, 50% of the balance at the end of the fourth year, or 50% of the balance at the end of the immediate preceding year, whichever is lower.
Pre-mature closure of a PPF account is permissible only in case of death.
5. PPF offers multiple tax benefits
Deposits in a PPF account qualify for a deduction under section 80C. Furthermore, the entire maturity amount including the interest is non-taxable. Not only is the interest earned tax free, PPF deposits are exempt from wealth tax too.
6. Need a Loan? Use your PPF
You could take a loan on your PPF deposit, subject to certain terms and conditions. Loans could be taken from the third year onwards till the sixth year. Up to a maximum of 25% of the balance at the end of 2nd immediately preceding year would be allowed as loan. Such withdrawals are to be repaid within 24 months.
Rate of interest charged on the loan would be 2% more than the PPF interest rate prevailing then.
A second loan could be availed as long as you are within the 3rd and the 6th year, and only if the first one is fully repaid. Also note that once you become eligible for withdrawals, no loans would be permitted. Inactive accounts or discontinued accounts are not eligible for loan.
7. Continuing PPF after the 15 year period
PPF account holders have an option of extending their accounts after the 15 year tenure with or without further subscription, for any period in a block of 5 years. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed. In case the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year.
If you continue the account after 15 years, with continued deposit, withdrawal up to 60 per cent of the balance at the beginning of each extended period (block of five years) is permitted.
Written by Ramya Ramachandran
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