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April 22, 2022

20 things to know about PPF

by CA Shivam Jaiswal in Compliance Law

20 things to know about PPF

The Public Provident Fund (PPF) scheme is a long-term investment option with a competitive rate of interest and returns on investment. The interest and returns earned are not taxable under the Income Tax Act. Under this system, one must create a PPF account, and the amount contributed during the year will be claimed as a deduction under section 80C.

1.ELIGIBILITY CRITERIA FOR PPF

A PPF account can be opened in the name of any Indian citizen. Parents/legal guardians can also open a PPF account in the name of a minor child. Joint PPF accounts are not permitted, and HUF (Hindu Undivided Family) accounts are also not permitted under current laws.

2. PPF FOR MINOR CHILD

A PPF account in the name of a minor kid can be opened by either parent, but only one account can be opened by each parent. A parent and minor kid can contribute a maximum of Rs. 1.5 lakh to a PPF account each year.

So, if Rs. 1.5 lakh is deposited in the minor’s PPF account in a financial year; the parent cannot invest an additional Rs. 1.5 lakh in his/her personal PPF account. While parents are permitted to open PPF accounts in their minor children’s names, grandparents are not permitted to do so in their minor grandchildren’s names. If a grandparent is the legal guardian of minor grandchildren, he or she can open a PPF account for them.

For Indians, a PPF account for a minor child is a popular investing option since it allows them to establish a tax-free corpus. When the PPF account matures after 15 years, this money can be used for a variety of things, including the child’s further education fees.

3. WHETHER NRIs CAN OPEN PPF?

According to the notification, if a resident who opened an account under this scheme becomes a non-resident during the currency of the maturity period, the account is deemed to be closed with effect from the day he becomes a non-resident, and interest is paid at the rate applicable to the Post Office Saving Account up to the last day of the month preceding the month in which the account is actually closed.

As a result of this new amendment, NRIs are no longer permitted to continue their PPF until it reaches maturity. Once  their status changes from resident Indian to NRI, their account will be cancelled immediately.

“Interest with effect from that date shall be paid at the rate applicable to the Post Office Saving Account up to the last day of the month before the month in which the account is actually closed,” says the fascinating note about interest pay out if you become an NRI.

4. INTEREST RATE IS GUARANTEED, BUT IT IS NOT FIXED.

The PPF’s interest rate is not fixed, but is tied to the yield on 10-year government bonds. The rate does not fluctuate day to day, but is set at the start of each quarter based on the average bond yield over the previous three months. Bond yields have climbed in the last three months, therefore rates are expected to rise as well. The rates of modest savings programmes, on the other hand, were already greater than the formula predicted. So, even if bond yields surpass the 7.5 percent level, don’t expect an increase in the PPF rate. Millions of investors are relieved that interest rates have not been reduced.

Interest rates of PPF in last 10 years

           FromToPPF Interest Rate
01.04.202031.03.20217.1%
01.07.2019  31.03.20207.90%
01-10-2018  30-06-2019  8%
27-12-2017  30-09-2018  7.6%
01-10-201631-03-2017  8%
01-04-2013  31-03-2016  8.7%
01-04-2012  31-03-2013  8.80%
01-12-2011  31-12-2012  8.60%

5. PPF OFFERS CHEAP LOANS.

Between the third and sixth years, a loan from the PPF is also possible. The loan is limited to a maximum of 25% of the previous year’s balance. The loan has an interest rate that is 1% greater than the current PPF rate. The loan against PPF will have an interest rate of 8.1 percent based on the existing PPF rate of 7.1 percent. If the PPF rate changes, this could alter. The interest rate is locked in after the loan is disbursed until the end of the payback period. The term of the PPF loan is 36 months. If the borrower is unable to repay within this time frame, the loan’s interest rate is increased to 6% above the PPF rate.

6. INVEST BY 5TH OF MONTH

Although the PPF interest is compounded annually, the calculation is done monthly. Every month, between the 5th and the final day of the month, interest is paid on the lowest balance. If you invest before the 5th of the month, you will receive interest for the entire month. Otherwise, it’s like giving the government a month’s worth of interest-free money. If you’re making an investment with a check, make sure you deposit it at least 3-4 days before the deadline. Your investment may miss the deadline and lose a month’s interest if your bank takes a long time to credit the funds or if there are holidays in between.

7. LOCK-IN DOESN’T MEAN 15 YEARS.

With a 15-year period, the PPF is a long-term investment. However, this does not imply that your funds are held for an extended period of time. The 15-year term begins on the day the account is opened. The lock-in time gets shorter with each passing year. It is only one year in the fourteenth year. As a result, a PPF account that was started in April 2008 will expire in April 2023. The account will have a 12-month lock-in period for contributions made in April 2022. Some investors use the PPF as an emergency fund because partial withdrawals are permitted after the sixth year.

8.TENURE CAN BE EXTENDED

When the account reaches maturity, the subscriber has the option to withdraw the full balance. However, the account can be extended in five-year increments indefinitely. With or without contributions, this extension is possible. To continue investing in the PPF account with contributions, the subscriber must write to the Post Office or bank within one year after the account’s maturity date. If he does not notify the bank or Post Office, the account will be automatically extended, but no further donations will be accepted. The sum will receive regular interest, and the investor will be able to make one withdrawal every year.

9. ALLOWED PARTIAL WITHDRAWALS

In the event of an emergency, PPF allows investors to make partial withdrawals. An investor can withdraw up to 50% of the balance at the conclusion of the fourth year, or the immediately preceding year, whichever is lower, after the sixth year. The subscriber can remove any amount from the account if it has been extended without additional contributions. The withdrawal limit is 60 percent of the account balance at the start of the extension term if the account has been extended with new contributions.

10. MINIMUM AND MAXIMUM PPF CONTRIBUTION 

In a financial year, you must deposit at least Rs 500 and a maximum of Rs 1.5 lakh to your PPF account. Even for accounts older than 15 years, a minimum investment of Rs 500 must be maintained. If you do not deposit at least Rs 500, your account will go dormant. Reactivating an inactive account carries a penalty of 50. If you deposit more than Rs1.5 lakh in a year, the additional cash will not receive interest, even if credited by mistake. The maximum annual contribution limit of 1.5 lakh includes contributions to PPF accounts in minor children’s names.

11. ACCOUNT CAN BE CLOSED

If an investor needs money for higher education, medical care for himself or his family, or if his residency status has changed, he can end his PPF account early. This can only be done if the account has been open for five years. Foreclosure carries a penalty as well. The interest rate on the balance will be 1% lower than the PPF rate. This 1% penalty may appear insignificant, but it will be applied throughout the account’s lifetime. If you have had a PPF account for the past 12 years and have earned 8% interest, the interest will be recalculated at a reduced rate of 7%. So, only use this option if you are in a true emergency.

12. PPF IS LOADED WITH TAX BENEFITS

The PPF comes with a slew of tax advantages. Contributions to the PPF qualify for a tax deduction up to a total of *1.5 lakh under Sec 80C. While the interest earned on a PPF is not taxable, it must be recorded on the individual’s tax return. Withdrawals are also tax-free and have no impact on the individual’s tax liability. Withdrawals of more than 20 lakh from a PPF account may be subject to TDS of 2-5 percent if the individual has not filed a tax return in the previous three years, according to a new rule implemented in 2020.

13. ADDITIONAL TAX BENEFITS

The PPF has additional tax advantages. If money given to a spouse is invested, the income from the investment is combined with the giver’s and taxed proportionately, according to current tax regulations. PPF income is tax-free, therefore even when combined with other sources of income, it does not increase the giver’s tax responsibility. As a result, by opening an account in his wife’s name, he may invest an extra *1.5 lakh every year in this tax-free refuge.

14. PREMATURE CLOSURE

It is not possible to close the account before the maturity time has ended. This means that a PPF account cannot be closed before the 15-year period has passed.

PPF Withdrawal Rules Before Maturity

*One cannot withdraw the entire amount from your PPF account. The amount is capped at the lower of the two – 50% of the balance at the end of the fourth financial year or 50% of the balance at the end of the preceding year.

*One can withdraw money from  PPF account any time after completion of five complete financial years meaning one can withdraw money in the seventh running year of the account. For this purpose, one will have to approach the bank/post office where the account is opened and submit Form-2.

* premature closure of the PPF account is allowed after five financial years after the account is opened. However, It is allowed only in the case of Life-threatening ailment diseases faced by the PPF account holder/partner/children or Children’s higher education.

15. TRANSFERABILITY

A PPF account with a 15-year term can be transferred from one post office to another.

16. LACKS IN LIQUIDITY

It is not the same as mutual funds and is hereby lacking liquidity. Your money is stuck for years on end and not as easy as selling shares or units of mutual funds. 

So, PPF has its share of pros and cons equally, when compared to some other plans like FDs, ELSS mutual funds. However, it is one of the preferable schemes until now due to its tax benefits. But it is always advisable to take experts’ advice whenever you are open to investing in a savings plan.

17. ONLINE MAINTANANCE

You can maintain a PPF account online as well. With internet banking booming, the use of online banking services has become convenient these days. You can maintain your PPF account online by making deposits, calculating your interest using the PPF calculator online, or keeping yourself updated with every new announcement.

18. FREE OF STOCK MARKET INFLUENCE

          In PPF, your investment wouldn’t be affected by stock market performance, as                      the investment is not exposed to equities. This is just the opposite in the case of mutual funds or SIPs.

19. THE SAFEST PLAN

PPF is initiated by the government, so there is no possibility of someone running away with your money. It is confirmed that you will get your assured amount at the time of maturity. So, investing in PPF is the safest decision.

20. ATTACHMENT OF PPF ACCOUNT FOR DEBT REPAYMENTS

A court order or decree cannot be used to seize a PPF account or its balance in order to pay off the subscriber’s outstanding debts or liabilities. While creditors are unable to access a PPF account, Income Tax authorities are not subject to the same restrictions.

The IT Department is legally permitted to use the PPF account balance to pay any tax-related demands that have been issued to the PPF subscriber.

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