Analysis of Public Provident Fund (PPF) Scheme

Aastha Grover

Public Provident Fund (PPF) Scheme Is a scheme floated under the PPF Act 1968 by the central Government.

PPF is a safe product, government backed and is a tax beneficial investment, which has low risk, and the risk is government risk.

Individuals (residents of India) are eligible to open their account under the Public Provident Fund scheme. Accounts may also be opened under the name of a minor by his/her legal guardian. However, each person is eligible for only one account under his/her name. Form A is required to be filled up for opening a PPF account. Online facility for the same is also available.

Non-resident Indians (NRIs) are ineligible to open an account under the Public Provident Fund Scheme. But can continue their existing accounts till its maturity. No extension is possible. However, a resident who becomes an NRI during the 5 year tenure, may continue to subscribe to the fund until its maturity on a non-repatriation basis. Contributions to PPF are tax deductible for salaried individual in India. Premature closure of account is not allowed. One cannot open an account in the name of a minor. If done so, it is considered to be his/her PPF account.

Funds can be transferred via CASH or NRO Account to the PPF account.

BRIEF

• Ideal investment option for both salaried as well as self employed classes.
• Loan facility available from 3^rd financial year up to 5th financial year.
• Withdrawal permitted from 6th financial year.
• Free from court attachment.
• An individual cannot invest on behalf of HUF (Hindu Undivided Family) or Association of person.
• Investors can subscribe to this scheme through Post Office or through banks appointed by Government. To open a PPF account, investor has to visit any of the banks/Post Office and submit account opening form and other documents
  

TECHNICALITIES

1. A minimum yearly deposit of Rs. 500 is required to open and maintain a PPF account.
2. Maximum Investment – A maximum deposit of Rs.100000 can be made in a PPF account in any given financial year, any amount greater than 100000 is not eligible for deduction under section 80 C.  The Maximum Investment limit in PPF  was earlier 70000 but has been changed to 100000 wef from 1/12/2011
   
3. The investments can be either in multiples of Rs 500, either in aggregate, or in installments (not exceeding 12 in a year, though more than one deposit can be made in a month).
4. The credit to the PPF account is made on the date of clearance of the cheque.
5. If one fails to make a deposit in any given year, penalty of 500 Rs is charged and one can make deposits for previous year. But will not get any returns for the past year.
6. Every subscription should be made in cash or through a crossed cheque or draft or postal order, in favour of the accounts office, at the place at which that office is situated.
7. It is also possible to transfer funds online using net banking to the PPF account.
8. The government of India decides the rate of interest for PPF account. Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month. The minimum tenure of the PPF account is 15 years, which can be further extended in blocks of 5 years each for any number of blocks.
9. The entire amount can be withdrawn on maturity. Interest received is tax free.
10. The interest is compounded. All the balance that accumulates over time is exempt from wealth tax. Even though loan and withdrawal facility is available but conditions therewith make it less liquid. It is suitable for investors who are risk averse.

FEATURES OF PPF.

•  But if found to be having more than one account then the second account will be deactivated. You will receive only principal amount.
• PPF account cannot have a joint holding.
• In case death of account holder the balance amount will be paid to the nominee so appointed or legal heir even before 15 years. So nominees or legal heirs are ineligible to continue with the PPF account of the deceased. If balance amount is more than Rs.100,000 then deceased nominee or legal heir have to prove their identity to claim the amount.
• PPF can be transferred from one place to another or among the PPF service providing institutions. But can’t be transferred from one person to another.
• There is a lock-in period of 15 years and the money can be withdrawn in whole after the lock in is over which is tax free. However, pre-mature withdrawals can be made from the end of the sixth financial year. The maximum amount that can be withdrawn pre-maturely is equal to 50% of the amount that stood in the account at the end of 4th year preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.
• If the minimum amount in any year is not invested then the account will be deactivated. To activate one needs to pay Rs.50 as penalty for each inactive year also would need to pay Rs.500 for each inactive year’s contribution.
• Interest earned is fully exempt from tax. Contributions to PPF accounts of the spouse and children are also eligible for tax deduction. Income Tax authorities can attach the account for recovering tax dues. Tax bracket for PPF is EEE (i.e. Exempt, Exempt, Exempt). So contribution is exempted under 80C, Interest earned is tax exempted and withdrawal is also exempt from tax.
• After maturity investor may either withdraw the accumulated balance and close the account or extend his PPF account, extension can be taken in a block period of 5 years for any number of times. As per terms and conditions prescribed by Government, an investor can avail of loan and withdrawal facility

SOME IMPORTANT TIPS

1.  Can changes be made to nominations?

Yes, changes to previous nomination(s) are possible by applying for fresh nomination(s) in Form F.

1. Can a PPF account be transferred?

Yes, a PPF account can be transferred from one account office to another.

1. Is Partial Withdrawal allowed from a Minor’s Account?

Withdrawals from a minor’s account requires the guardian to furnish a certificate in the following form:

“Certified that the amount sought to be withdrawn is required for the use of ______________ who is alive and is still a minor.”

1. Partial withdrawals in the block periods shall be limited to one per each financial year and are not to exceed 60% of the balance outstanding at the commencement of the block period.
2. On completion of the first block period, may continue to subscribe for further block periods, subject to the limits of subscription and exercise of such option should be done in the first financial year of every extended block period.
3. Can a PPF account Continue without Deposits after Maturity?

A subscriber can retain his / her PPF account after maturity without making any further deposits. The balance will continue to earn interest.

1. How to repay the loan taken from PPF?

The principal amount of the loan is to be repaid before the expiry of thirty-six months from the first day of the month following the month in which the loan is sanctioned.The loan repayment is to be made either in lump sum or in two or more monthly installments within the thirty-six month period.

After the principal amount of the loan is fully repaid,then interest amount shall be paid in not more than two monthly installments. Interest is calculated at 2% above on the principal amount for the period commencing from the first day of the month following the month in which the loan is availed up to the last day of the month in which the last installment of the loan is repaid.

1. Is change in name of female on account of marriage possible?

• In the event of her marriage, a female subscriber may request for change in surname by submitting a documentary evidence.

9. How is the repayment of loan done after the death of the subscriber?

If a subscriber dies,having made a nomination which is in force, the nominee/ nominees may make an application in Form G,to the Bank together with the proof of death of the subscriber On receipt of such application all amounts standing to the credit of the subscriber after making adjustment, if any in respect of interest on loans taken by the subscriber shall be repaid by the Bank to the nominee/nominees. If the nominee has died, the surviving nominee/ nominees shall, in addition to the proof of death of the subscriber, shall also furnish proof of the death of the deceased nominee. Where no nomination is in force at the time of death of the subscriber,the amount standing to the credit of the account of the deceased (after making adjustment, if any, in respect of interest on loans taken by the subscriber) be repaid by the Bank to the legal heirs of the deceased (on receipt of application in Form G). If the credit balance standing in the account is upto Rs.1 lakh, the same may be paid to his/her legal heirs on production of :

a)  A letter of indemnity.

b). An affidavit

c) A letter of disclaimer on affidavit, and

d) A certificate of death of subscriber, on stamped paper.

After the death of the subscriber does the PPF account earn interest

1. On the death of the subscriber, the balance in PPF a/c does not cease to earn interest. The interest is admissible on the balance standing to the credit of his account till the end of the month preceding the month in which payment of the deposits is made to the nominee / legal heirs.
2. How to get an extension:For the purposes of extension,apply by filling “H” form within one year from the date of maturity of the account. The from is available at the bank or post office or even online.
   

ADVANTAGES

•  Lowest risk possible
• The PPF is a government-backed scheme, therefore it is safe.
•  Great returns
• An investment in PPF will earn about 8% per annum. But due to the tax rebate, it works out to be higher than 8%.

DOWNSIDES

•  The interest rate keeps changing
• It was initially 12% per annum, then dropped to 11%, then 9.5% and is now 8%. This rate of interest is fixed by the government
• If the interest rate on PPF declines, interest rates on all other deposits and bonds also declines. So, there are no other alternative fixed-return investments in comparison to this.
•  Lengthy lock-in period
• Fifteen years is the lock in period. But, it actually works out to be 16 years since the last contribution is made in the 16th financial year.
• Even if investment is made on the last day of your account you will still get a tax rebate. lnterest will not be earned on the amount invested on the last day.
• Can also be used as a retirement planning tool.

Interest is calculated on the lowest balance

• Interest is calculated on the lowest balance between the fifth and the last day of the month of March.
• If making a last minute deposit at the end of the financial year, do so before March 5.

 Lack of liquidity

• Your money is stuck for a long term.
• But one may choose to take a loan from the third year of opening your account to the sixth year. The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. Partial withdrawals can only be made after five financial years are completed from the end of the year in which the initial subscription was made. So, it works out from the seventh year onwards.
• The amount of withdrawal is limited to 50% of the balance in your account at the end of the fourth year immediately preceding the year in which the amount is to be withdrawn; or at the end of the preceding year, whichever is lower
• Hindu Undivided Family can not open a account under this scheme. However, Accounts opened prior to May 13, 2005 may continue subscription to their account till maturity. but can not extend the account any further.

Checkout the Interest on PPF Exempt Under Section