Public Provident Fund, popularly known as PPF is all time favorite investment for many retail investors. It is popular amongst the investors since its launch. PPF is considered as the best tax-effective investment vehicle for long term wealth creation. PPF investment is backed by Government so returns and principal are sovereign guaranteed. PPF is one investment vehicle that falls under the Exempt-Exempt-Exempt (EEE) category. This, in other words, means that all deposits made in the PPF are deductible under Section 80C of the Income Tax Act. Yearly interest earned on the account is tax-free and the accumulated amount is also exempt from tax at the time of withdrawal.
Essential Features of PPF account.
1. PPF is a 15-year deposit account. The account can be continued after completion of 15yrs for further blocks of 5 yrs. Once the account is continued without contribution for more than a year, the option cannot be changed.
2. A person can hold only one PPF account in their name except for an account in the name of a minor child to whom he or she is a guardian. A joint account cannot be opened however nomination facility is available.
3. The minimum amount that needs to be deposited is Rs 500 per year. The maximum limit is Rs 150000. Subscription should be in multiples of 5 and can be paid in a lump sum or in installment not exceeding 12 in a financial year. Penalties apply if the minimum deposit is not made in a financial year.
4. The account can be opened with just Rs 100. Annual investments above Rs 1.5 lakh will not earn interest and will not be eligible for tax saving.
5. The deposit into a PPF account can be made either by way of cash, cheque, Demand Draft or through an online fund transfer.
6. Interest is calculated on the lowest balance available in the account between 5th of the month and the last day of the month. So it is advisable to deposit in PPF account on or before 5th of every month.
7. The current interest rate is 7.9% from 1st August 2019 that is compounded annually. The Finance Ministry announced the rate of interest of PPF account on a quarterly basis. The total interest in the year is added back to PPF only at the year-end. Interest is accumulated and not paid out.
8. Since PPF is backed by the Indian government, it offers guaranteed, risk-free returns as well as complete capital protection. The element of risk involved in holding a PPF account is minimal.
9. In the event of the death of the account holder during the term of the scheme, the balance in the account shall be paid to the nominee or to the legal heir if the account does not have a nomination.
10. A PPF account is not subject to the attachment (seizure of the account by Court order) under any decree of a court.
Instituted in 1968, the objective of the PPF account is to provide a long term retirement planning to the investors. It can be opened in a designated post office or a bank branch. It can also be opened online with few banks. One is allowed to transfer a PPF account from a post office to a bank or vice versa. A person of any age can open a PPF account; even those with an EPF account can open one.
How to open a PPF account?
A PPF account can be opened in designated bank branches of SBI and its subsidiaries and as well as ICICI Bank, Axis Bank, HDFC Bank, Bank of Baroda,Central Bank of India, Bank of India (BOI), IDBI, Central Bank of India, Punjab National Bank, Indian Overseas Bank, and few others. It can also be opened in the post office too.
Following are the documents required to open a PPF account :
(i) PPF Account opening form, available at the bank branch or the Indian Post portal.
(ii) ID proof that includes any of the following:
a) PAN card
b) Driving license
c) Voter ID card
d) Passport
e) Aadhaar Proof
For online applications, there are separate procedures for all the banks but the basic documentation and submission of application remains the same.
(iii) Address proof, from any of the following:
a) Telephone bill
b) Electricity bill
c) Ration card
d) Aadhaar Card
(iv) Two current passport size photographs
(v) Pay-in-slip at the bank branch to transfer the amount to your PPF account, or a signed cheque in favor of your PPF account.
(vi) For a minor, a birth certificate may also be required as an age proof
Please note that all documents have to be self-attested, and originals have to be taken while opening the account.
Withdrawal options: available from the PPF account.
1. One withdrawal in a financial year is permissible from the seventh financial year.
2. Maximum withdrawal can be 50% of the balance at the end of the fourth year or the immediately preceding year, whichever is lower.
3. Premature closure of the PPF account is allowed in cases such as serious aliment, education of children and such. This shall be permitted with a penalty of a 1% reduction in interest payable on the whole deposit and only on the deposit that has completed 5 years from the date of opening.
Loan facility on PPF account
Account holders can avail of a loan facility in the 4th to a 6th year out of the amount standing to the credit in the account between the 3rd financial year to the 5th financial year.
Conclusion
PPF suits those investors who do not want volatility in returns akin to the equity asset class. It is for non-salaried people who are not eligible for retiral benefits. Self-employed professionals such as doctors, architects, and chartered accountants should use it to build the debt portion of their retirement nest egg. It is one of the best option available in the debt category for retirement planning. It is a long term investment avenue and with the disciplinary approach, an investor can create long term wealth easily.
