The Public Provident Fund is one of the safest and convenient modes of investment for Indians.
Illustration: Uttam Ghosh/Rediff.com
The Public Provident Fund, or PPF, is a government backed small-saving scheme.
Though initially started with the objective of providing social security during retirement to workers in the unorganised sector and for self-employed individuals, it has become a very popular tax-saving instrument.
Here are some important points to keep in mind before investing in PPF.
1. The return is guaranteed but keeps changing
The return is assured but flexible.
You are promised a fixed return every year, though the exact figure fluctuates.
From 12 per cent per annum, it dropped to 11 per cent, 9 per cent, 8 per cent crept up to 8.8 per cent and is now at 8 per cent.
The fluctuation is because the rates were fixed annually and benchmarked against the 10-year government bond yield. Now the rates are being fixed quarterly.
2. Interest is compounded annually, not semi-annually
The interest is compounded on an annual basis and credited to the account on March 31 every year.
3. Make your investments early in the month
The interest is calculated on the lowest balance between the fifth and the last day of the month.
So to maximise your earnings, if you make multiple deposits, ensure that you do them between the 1st and 4th of the month.
4. It ranks the highest in terms of safety
Since the PPF is a sovereign backed investment (which means it is issued by the national government of a country), it stands for the highest safety.
The reasoning being that the government will not default on its payment.
5. It is a very secure investment
The amount in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder.
While it was given to understand that the Income Tax authorities can attach the account for recovering tax dues, the court has ruled otherwise. (Source: Taxguru.com, Tax blog, Taxvani.com).
6. You can only have one account.
At any point, you are allowed to have only one PPF account in your name.
If you are found to have more than one, the second account will be instantly deactivated and only the principal will be returned.
7. There is no concept of joint account
You can nominate another individual but cannot hold a joint account. You can open an account in the name of a minor child of whom you are the parent / guardian.
However, that account will be in the child's name and you are the guardian.
8. Make note of the minimum and maximum investments
The minimum you can invest in any single financial year is Rs 500 and the maximum is the limit under Section 80C -- which is currently Rs 1,50,000.
This limit is not just for your account, but even for the account where you are a guardian.
Assume you have an account and your wife has an account. The account in your child's name has you named as the guardian.
In that case, the total amount in your PPF account and your minor child's PPF account must be a maximum Rs 1,50,000.
9. Triple tax break: EEE
Investments made in PPF are eligible for a deduction up to Section 80C. The interest earned is not taxable.
Finally, on withdrawal, no tax is levied on the maturity amount.
EEE stands for Exempt, Exempt, Exempt: Your investment is allowed for a deduction. So, you don't have to pay tax on part of the income that equals the invested amount.
You don't have to pay any tax on the returns earned during the accumulation phase. Your income from the investment would be tax-free in your hands at the time of withdrawal.
10. Long lock-in period
The scheme was promoted to encourage long-term savings, especially for retirement. Hence the lock-in period of 15 years should not be surprising.
Although part withdrawals and loans are allowed on completion of a particular number of years, these are available only as a percentage of the total balance.
11. The NRI factor
Non-resident Indians cannot open a PPF account.
However, if an individual attains the NRI status after the account has been opened and is functional, he can continue with the account till maturity (though the money cannot be repatriated).
12. Mobility is no problem.
Individuals can open a PPF account at any branch of State Bank of India, its associated banks, certain nationalised banks, and the post office.
ICICI Bank and HDFC Bank also provide this service.
If shifting residence, intra-city or to another city, the account can be transferred to a bank or 'account office' that the account holder chooses.
Lead image used for representational purposes only. Image: Reuters