Public Provident fund- A must for most investors!
Public Provident Fund account is one of the most common investment instruments for retirement planning available in India. It provides a fixed interest accrual on investments made in it. Any individual in India, salaried or self-employed, can open a PPF account. He should be resident & can open in his own name i.e. single name account. He/she can also open in his/her child’s name too.
Public Provident Fund (PPF) is a statutory scheme of the Central Government of India. It is considered one of the best and the safest long-term schemes as it is a Government security. It was created to provide social security for citizens as not much in the name of social security is available in India.
A PPF account can be opened in any branches of the State Bank of India or a Head Post Office or a sub post office or any nationalized bank. On opening a PPF account a passbook is given to keep a track of all the transactions. This scheme is very beneficial for employees of an unrecognized sector or a self employed for their any long-term plans especially retirement. We at Fpguru.com will highlight some important details about this instrument to understand why it is one of the best long term investment.
Annual amount to be deposited is very low and affordable- The account can be opened with a minimum subscription of Rs.500 and maximum of Rs.1,00,000 in the multiples of Rs 5/-(by cheque). An individual can either make a lump sum deposit or in installments but not more than 12 installments in a year. A default account can also be re-opened by minimum deposit of Rs 500 & Rs 50 as default fees for every defaulted year.
Best known for its maturity proceeds- PPF is known as one of the best long-term scheme because of its maturity proceeds. A PPF accounts matures after 15 complete financial years (i.e. from 1st April to 31st March is considered one complete year irrespective of the date on which the money is deposited initially. Thus if the account is opened in 15th December 1994 it will still mature on 1st April 2010). This account cannot be closed pre-maturely except in case of death (Nominee/legal heir of PPF Account holder cannot continue the account after the death). If a person stops making any deposits after maturity the balance can be continued to earn interest. The account can also be extended after maturity for any period for a block of 5 years.
Interest Rates are not fixed anymore- The interest rates are decided by the government of India. Initially the interest rates were fixed at 8% per annum compounded annually. However the PPF interest rates have been increased from 8% to 8.6% to 8.8% w.e.f. 1st April 2012. The PPF interest rate 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 at the end of the year.
Treated as EEE benefit- This is where PPF scores very high among all schemes. PPF provides not one but three tax benefits. The amount deposited in this account can be deducted under section 80 C (i.e. this amount can be deducted from the taxable income), the second benefit is that the interest accrued is tax-free (i.e. not taxed in your income unlike Fixed deposit interest) & third benefit is that amount received on maturity or withdrawals is also tax free. There is also no wealth tax on the deposits. Thus PPF is treated as EEE benefit (exempt-exempt-exempt) implementing that contribution, interest earned, & withdrawals are tax free.
The account cannot be closed pre-maturely but provides withdrawal and loan facilities-
Withdrawals: the account holder can make one withdrawal during one year. This withdrawal can be made from the 7th financial year onwards. The amount that can be withdrawn will be limited to 50% of balance in the account at the end of the preceding year of withdrawal or 50% of balance in the account at the end of the 4th year immediately preceding the year of withdrawal whichever is lower.
Example:
The account is opened in the year 95-96. Withdrawal can be done from the 7th year i.e. 01-02
Loan: the account holder can also take loan incase of any emergency need. The first loan can b taken from the 3rd year of opening the account. The amount withdrawn will be limited to 25% of balance including interest in the end of the 1st year.
Example: if the account is opened in the year 95-96
Loan taken is to be repaid in 24 months. Loan can be taken from the 3rd year of opening the account to the 6th year. The rate of interest charged on the loan amount is 2% over and above the rate of interest received in the PPF account. After paying the first loan the account holder can take another loan as long as he is within the period of 3rd and 6th year of opening the account.
Keeping in mind the above benefits PPF account is considered the safest and best especially for non-salaried people as they do not get any post retirement benefits. Another important aspect of a PPF account is that it is not attached under any order or decree of court, this means that if all the assets of a person are liquidated to pay off his liabilities the entire amount under PPF can kept with himself. Thus a PPF account is considered important for any long term plan and one should posses atleast one account per family.
By Namrata Shah.
The writer is working with FpGuru.com as a Financial planner.
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