Wealth Management & Personal Financial Planning

Public Provident Fund

The Public Provident Fund is savings-cum-tax-savinginstrument in India.

Introduced by the National Savings Institute of the Ministryof Finance in 1968.

The aim of the scheme is to mobilize small savings byoffering an investment with reasonable returns combinedwith income tax benefits.

About PPF

Eligibility

Individuals who are residents of India are eligible to opentheir account.

A PPF account may be opened under the name of aminor by his/her legal guardian. However, each person iseligible for only one account under his/her name.

Non-resident Indians (NRIs) are not eligible for PPFaccount. This is an act regulation by Indian Govt. Howevera resident who becomes an NRI during the 5 years' tenureprescribed under PPF Scheme, may continue to subscribeto the fund until its maturity on a non-repatriation basis.

Benefits

The account cannot be attached to any claim in case ofdebt or liability.

If you go bankrupt, this money can never be claimed byany creditor to repay a debt.

Investment and returns(contd…)

A minimum yearly deposit of Rs. 500 is required to openand maintain a PPF account, and a maximum deposit ofRs.1.5 lakhs (w.e.f August 2014) can be made in a PPFaccount in any given financial year.

The subscriber should not deposit more than Rs.1.50 lacper annum as the excess amount will neither earn anyinterest nor will be eligible for rebate under Income TaxAct.

The amount can be deposited in lump sum or in amaximum of 12 installments per year through SystematicInvestment Plan(SIP).

Investment and returns

The current interest rate effective from 1 April 2013 is 8.7%Per Annum (compounded annually).

Interest will be paid on 31st March every year.

Interest is calculated on the lowest balance between theclose of the fifth day and the last day of every month.

if you are investing from a different bank account (i.e. notSBI), it will take up to 3 working days for the amount tocredit to your PPF.

How do I open a PPF account?(contd…)

In any “State Bank of India” branch, or a branch of any ofState Bank’s subsidiaries, any nationalized banks, and thepost office.

Fill In the form attach photograph state PAN Number.

Receive a pass book which will record all PPF transactions.

Only 1 PPF account per person.

We can also have an account in the name of a minorchild of whom you are the parent / guardian. Howeverthat will be the child’s account, we will simply be theguardian. We can never have a joint account.

How do I open a PPF account?

In case of more than 1 account in your own name, thesecond account will be deactivated, and only yourprincipal will be returned to you.

If you have a General provident Fund account, or anEmployees Provident Fund account, you can still have aPPF account – there is no restriction.

Loans

Loan facility available from 3rd financial year up to 5thfinancial year.

The interest charged on loan taken on PPF account on orafter 01.12.2011 shall be 2% more than the prevailinginterest on PPF.

Up to a maximum of 25%of the balance at the end of the2nd immediately preceding year would be allowed asloan. Such withdrawals are to be repaid within 36 months.

You can take a second loan against your PPF accountbefore the end of your sixth financial year, but yoursecond loan can be taken only once your first loan is fullysettled.

Withdrawals There is a lock-in period of 15 years and the money can be

withdrawn in whole after its maturity period.

Pre-mature withdrawals can be made from the end of thesixth financial year from when the commenced.

The amount that can be withdrawn pre-maturely is equal to50% of the amount that stood in the account at the end of4th year preceding the year in which the amount iswithdrawn or the end of the preceding year whichever islower.

After 15 years of maturity, full PPF amount can be withdrawnand all is tax free, including the interest amount as well.

Not more than one withdrawal shall be permissible duringany one year.

Maturity(contd…)

3 Choices after maturity:-

1. Withdraw your maturity account.

2. Extend maturity by a 5 year block.(as many times as youwant and make fresh contributions).

3. Extend the account without making any furthercontributions.

Maturity(contd…)

Extend maturity by a 5 year block with fresh contribution

you can also make withdrawals from the account, up to60% of the account balance that was there at thebeginning of the extended period.

Maturity

Extend maturity by a 5 year block without any freshcontribution

Any amount can be withdrawn without any restriction,however you can only withdraw once per year. Thebalance will continue to earn interest till it is withdrawn.

In case forget to invest one year?

Your account is considered de-activated. In order to re-active your account, you need to pay a fine of Rs.50 foreach year that you have not made any subscription, andalso make a minimum subscription of Rs. 500 for each yearyou have missed. Then your account will be reactivatedand you will re-start earning interest.

However, the account can be regularized by remitting apenalty of Rs. 50 per financial year and this should becredited to Government of India /Reserve Bank of India.

How do we close, transfer or extend?

You can close the account after completion of 15 years orthe expiry of 15 years from the close of the financial yearin which the initial subscription was made.

In case of death of the account holder, the balanceamount in the account of the deceased account holderwill be paid to his nominee or legal heir. The nominee orlegal heir cannot continue the account by making freshsubscriptions to it.

Your PPF account can be transferred at the request of thesubscriber from one office of SBI or its associates to theHead Post Office or vice versa. A PPF account cannot betransferred from one person to another.

Tax Exemption

Considering that your child is a minor, you as the parent /guardian are not entitled to dual exemption of up to Rs. 3lakhs, the exemption limit remains at Rs. 1.5 lakh for aminor child.

However, if you open an account in your spouse’s name,you are eligible for a secondary deduction on the amountinvested in her name.

Nomination

Nomination facility is available in the name of one or morepersons. The shares of nominees may also be defined bythe subscriber.

If you nominate a minor, then you should also appointsomebody to receive and hold the PPF funds until thenominee attains majority.

PPF for HUFs

Existing HUF PPF accounts will continue to operate normallyuntil maturity, but cannot be extended beyond maturity,and no new HUF PPF accounts can be opened.

Pros

• Broadly, the PPF account is a good thing to have,especially for those individuals who do not work in thecorporate sector and hence don’t have an EPF account,but even for salaried individuals nonetheless.

• From a tax perspective, this is a very sound avenue, givingyou tax deductions on investment as well as taxexemption at the time of maturity.

• This money is yours for the keeping – it cannot beattached by order of a court to any debt or liability youmay have.

Cons

• However it is important to note that from a liquidity pointof view, your funds are locked in for 15 years, andwithdrawals are limited.

• Given that it is such a long term investment (16 years frombeginning to end), the rate of return might be consideredlow by some for this tenure.

Conclusion

• when choosing your tax saving avenue, be sure to chooseaccording to your risk appetite.

• If you are a conservative to moderate investor, the PPF is avery good investment avenue.

• Even if you are an aggressive investor, the PPF can be asafe hedge against your more risky investments.

• Keep your liquidity needs, life goal time horizon and riskappetite in mind when investing.

References

• D:\Thapar\Sem 5\WM & PFP\Presentations

• http://en.wikipedia.org/wiki/Public_Provident_Fund_%28India%29

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