Public Provident Fund (PPF) scheme Investment Limit, Income tax benefit, Features
The
Public Provident Fund is the darling of all tax saving investments.
No wonder! 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. You can
be sure no one is going to run away with your money. Here, we summarise
the scheme, tell you how to open a PPF account and what to expect.
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 neighbourhood.
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.
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. Earlier NRIs were not even allowed to make
contributions into existing PPF accounts, that is, accounts opened
before they became NRIs. However, in 2003, a notification (MOF (DEA) No
GSR 585 (E) dated 25.7.2003) was issued permitting NRIs to continue
investing in existing PPF accounts till maturity. An NRI can now invest
up to Rs 70,000 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. 70,000 in a financial
year. The interest you will earn is 8% per annum. 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.
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. So, if you opened it in
FY 2006-07 (this financial year), you will be able to withdraw it 15
years later, starting March 31, 2007 (end of this financial year). That
means your PPF matures on April 1, 2022. It can be extended for a period
of five years after that. During these five years, you earn the rate of
interest and can also make fresh deposits. 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 :-Till
recently, in case of a PPF when a subscriber used to make deposits by
local cheque or demand draft, the date of tender of cheque or draft at
the accounting office was treated as the date of deposit of PPF,
provided the said cheque was duly honoured on presentation for
encashment.
In
contrast, in case of other small savings schemes like Post Office
Savings Scheme (POSS), Senior Citizen Savings Scheme 2004 (SCSS) any
money deposited in these accounts by means of a cheque, the date of
encashment of the cheque is treated as the date of deposit.
Thus,
in order to remove inconsistency between PPF and other small savings
schemes and to bring in uniformity in the reckoning of the date of
deposit of all the schemes, the government has issued necessary
instructions through the circular to banks / other intermediaries which
hold PPF accounts for the individuals to treat the date of realisation
of the cheque or demand draft by the subscriber 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 :-There have been certain practical hurdles in respect of opening of accounts for minor vis-à-vis some intermediary agencies. This clarification reiterates that as per the rules under 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.
8. Opening an account for a minor :-There have been certain practical hurdles in respect of opening of accounts for minor vis-à-vis some intermediary agencies. This clarification reiterates that as per the rules under 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.
Let’s
say you open an account for your minor child. You can deposit Rs 70,000
in your account and Rs 70,000 in your child’s account. In this case you
can in my opinion take the maximum benefit of Rs. 1,00,000/- U/s. 80C.
As Limit of Maximum Investment in a year of 70000/- is fixed by Public
provident Fund Act not by Income Tax law.
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 Instalments.
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. Says Sandeep Shanbhag, Director of Wonderland Investments
and an expert in NRI financial matters, “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,” says Shanbhag adding, “We hear of instances where banks allow NRIs to extend the PPF account only for 2 blocks of 5 years or 3 blocks of 5 years. But according to the rule book 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 Paid: 8%, compounded half-yearly
|
Interest Paid: 8%, compounded annually
|
No monthly/yearly payments
|
No monthly/yearly payments
|
Minimum investment: Rs 100Maximum investment: No Limit
|
Minimum investment: Rs 500 (required annually)Maximum investment: Rs 70,000
|
Duration of investment: 6 years
|
Duration of investment: 15 years
|
Can be used as a security for mortgage and other purposes
|
Cannot be used for such purposes
|
Tax benefit under Section 80 ‘C’ available.Maximum limit: Rs 100,000
|
Tax benefit under Section 80 ‘C’ available.Maximum limit: Rs 70,000 (limit of the investment in PPF)
|
Good medium-term investment option
|
Good long-term investment option
|
Interest if fully Taxable
|
Interest 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.
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