CA Sandeep Kanoi

CA Sandeep KanoiThe Public Provident Fund is the darling of all tax saving investments.  You invest in it and you get a deduction on your income. Besides, the interest you earn on it is tax-free. Since it is a scheme run by the Government of India, it is also totally safe.

PPF refers to Public Provident Fund and is a Long Term Debt Scheme of the Govt. of India on which regular interest is paid. Any Individual (whether Salaried or Self-Employed or any other category) can invest in this scheme and can earn a handsome tax-free return on the same which is usually higher than the return offered by Banks on Fixed Deposits.

1. Where You  can open a PPF Account and How?

a . To open a PPF account, drop  by a State Bank of India branch. SBI’s subsidiary banks can also open accounts. A list of these subsidiary banks is available on the bank’s Web site.You can even visit the nationalised bank in your neighborhood. Selected branches of nationalised banks can also open accounts.The head post office or selection grade sub-post offices also open PPF accounts.

b. You will have to fill up a form. You can take a look or download the form from SBI’s web site. Along with the form, attach a photograph and submit your Permanent Account Number. If you do not have a PAN, then furnish an attested copy of either your ration card, voter’s identity card or passport. When you open an account, you will be given a passbook (just like a bank pass book) in which all subscriptions, interest accrued, withdrawals and loans are recorded.

PPF

Image courtesy of Mister GC at FreeDigitalPhotos.net

2.  Who can and who cannot not open PPF Account?

a. Who Can Open PPF Account – Any Individual (whether Salaried or Self-Employed or any other category) can invest in this scheme. HUFs are no more allowed to open any PPF account

b. Who Can Not open PPF Account- NRI’s are not allowed to subscribe to PPF Account. However, if someone opens a PPF Account while he is a Resident of India but subsequently becomes a NRI, he shall be allowed to continue investing in his account.  An NRI can  invest up to Rs 1,00,000 per financial year in an existing account, that is, an account that he opened prior to becoming an NRI. If someone  inadvertently opened an account after becoming an NRI, it is best to close it before it comes to the attention of the concerned authorities in India.

3. You can have only one PPF account in your name. If, at any point, it is detected that you have two accounts, the second account you have opened will be closed, and you will be refunded only the principal amount, not the interest.

4. You cannot open a joint account with another individual. The account can only be opened in one person’s name. You are free to nominate one or more individuals. On the death of the account holder, nominees cannot keep the account going by making contributions. If there are no nominees, the legal heirs get the money. You can open one account for yourself and others for your child/ children. But, on your death, your children cannot make any additional contributions.

5.   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. 1,50,000 in a financial year.  The interest you will earn is currently wef 01.04.2014 is 8.70% per annum (compounded yearly).  Deposits could be in either one go, or in flexible installments (in multiples of Rs. 10). You could vary the amount and the number of installments, as per your convenience, provided you do not exceed 12 installments 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.

6.  Continuing PPF after the 15 year period-  The PPF account is valid for 15 years. The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account.  Once your account expires, you can open a new one. The only limitation is that you cannot withdraw it until seven years are completed, after which 50% of your deposits can be withdrawn, if needed.

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.

7. Deposit date in Cheque payments :- In case of PPF account money deposited  by means of a cheque or demand draft, the date of encashment / Realisation  of the cheque or demand draft will be treated as the date of deposit. This issue becomes particularly relevant in respect of deposits made towards the end of the financial year by cheque / demand draft because if the same is not realised by March 31, then the same will be treated as deposits for the following financial year. This would also have ramifications in respect of the tax deduction being claimed by the individuals in a particular tax year.

8. Opening an account for a minor :- U
nder PPF scheme, an individual may on his own behalf or on behalf of a minor of whom he is a guardian, open a PPF account. Further, either father or mother can open PPF account on behalf of his / her minor child, but both cannot open the account for same child.

9. Loans on PPF Account

Loans can be availed from the 3rd financial year excluding the year of deposit. Amount of such loans must not exceed 25 percent of the amount that stood to the account holder’s credit at the end of the second year immediately preceding the year in which the loan is applied for.

A fresh loan is not allowed when a previous loan or interest is outstanding. Interest is charged at a rate of 1% if repaid within 36 months and at 6% on the outstanding loan after 36 months. The repayment may be made either in lump-sum or in Installments.

10. Benefit of Investing in PPF – Taxation of PPF

a. Benefit u/s 80C – The Investments made in PPF Account are eligible for deduction u/s 80C

b. Tax Free Interest – No Tax is payable on the Interest Earned on PPF Account.

11. 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.

12. The Interest Rate of PPF is decided by the Govt. The Current Interest Rate on PPF is 8%. The Interest is computed for a calendar month on the basis of the lowest balance in an account between the close of the 5th day and the end of the month and the Interest is credited to the account of the account holder at the end of the year.

13. From which account can an NRI invest in the PPF account?

An NRI can use funds in the NRE account or the NRO account to make investments in the PPF account. It is important to remember that the PPF rules require you to invest at least Rs 500 per financial year in the PPF account. If you fail to make the minimum investment in a year or years your account will be considered dormant. Subsequently, when you want to revive the account, you would need to invest Rs 500 for each year that you missed plus pay up a penalty of Rs 50.

14. What happens on maturity of PPF Account of NRI?

If you are an NRI at the time the deposit matures, you would need to withdraw the balance. An NRI is not eligible for extension on the PPF account. What happens if you leave the account unattended past the maturity date? “In such cases the account will be considered ‘extended without contribution’ in blocks of 5 years for an unlimited period of time. Extended without contribution means that the NRI will not have to make the minimum yearly investment of Rs 500. His account will continue to earn interest at the prevailing rate. According to the PPF deposit rules the extension can be made for an unlimited period of time.

15. What are the differences and similarities between the National Savings Certificate (NSC) and PPF?

National Savings Certificate (NSC)Public Provident Fund (PPF)
Interest Rate:  5 Year NSC – 8.50 %, compounded half-yearly on amount invested after 01.04.201410 Year NSC – 8.80 %, compounded half-yearly  on amount invested after 01.04.2014Interest Paid: 8.70%, compounded annually
No monthly/yearly paymentsNo monthly/yearly payments
Minimum investment: Rs 100Maximum investment: No LimitMinimum investment: Rs 500 (required annually)Maximum investment: Rs 1,50,000
Duration of investment: 5 years for NSC VIII Issue & 10 Years for NSC IX IssueDuration of investment: 15 years
Can be used as a security for mortgage and other purposesCannot be used for such purposes
Tax benefit under Section 80 ‘C’ available.Maximum limit: Rs 150,000Tax benefit under Section 80 ‘C’ available.Maximum limit: Rs 1,50,000
Good medium-term investment optionGood long-term investment option
Interest is fully TaxableInterest is fully Exempt

Do consider opening a PPF account if you do not have one. You can put in as little as Rs 500 a year to keep it going.

16. Only the person actually depositing the amount gets section 80C benefit

This means if your spouse deposits any amount into your PPF account, you will not be able to claim the deduction benefits under section 80C. Infact, your spouse will be able to (rightfully) claim section 80C deductions on his/her income.

17. You cannot claim section 80C deductions for any amount deposited by you into your parents’ or siblings’ accounts

While tax laws allow you to claim 80C tax benefits for deposits into your spouses account, the same rule does not apply to your parents, siblings or relatives.

(Republished with amendments)

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