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March 23, 2000

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Everything you wanted to know about PPF

Larissa Fernand

The public provident fund is one of the most popular investment options. Here are some frequently asked questions on this subject.

How does PPF score over NSC?
In a way, both are competing investments, which offer a lumpsum on maturity, an identical return of 11 per cent compounded annually, and a tax rebate. So what should be the determining factor? Tenure of the investment and tax on interest earned.
Since interest earned on PPF is totally exempt from tax under Section 10 of the Income Tax Act, it scores over NSC where section 80L is applicable.
That brings us to tenure. If you are looking at a short-term investment or if you are saving for a particular goal six or seven years down the road, then opt for NSC which has a maturity period of 6 years. If a long-term investment is what you have in mind, go in for the PPF.
Fairly inconsistent with your savings? Opt for PPF. It will force you to keep some amount of money aside every year for 15 years (assuming that you go way above the minimum, which is as low as Rs 100). If you are a spendthrift, then maybe you should just go and buy yourself an NSC certificate before you spend the money (here, too, assuming you do so for an amount higher than the minimum Rs 100).

How does PPF compare with the ICICI bonds?
The ICICI bonds score over PPF, in that they offer a rebate on an investment of up to Rs 70,000. The maximum amount for PPF in one year is Rs 60,000. However, since they both come under section 88, an individual can reduce his tax liability by up to Rs 14,000.
Depending on the scheme, you can check if the interest too is exempt. Some schemes come under section 80L, others don't.
However, it requires a higher minimum investment: Rs 5,000 for the regular scheme and Rs 7,350 for the cumulative option. The maximum investment depends on the terms of offer.
Though the rate of interest is compounded annually, the interest rate depends on what ICICI declares. The major benefit is that the tenure is much shorter, just three years for the regular scheme, and 39 months for the cumulative option.

What is the actual yield on the 11 per cent annually compounded return?
If you are in the 34.5% bracket, the tax equivalent yield amounts to 16.79 per cent. It amounts to 14.10 per cent and 12.22 per cent, if you are in the 22 per cent or 10 per cent tax brackets. This means that if you want a similar return, you will have to scout for an investment that offers you these returns putting the risk factor at the forefront.

What is the investment leeway offered?
You can invest anywhere from Rs 100 to Rs 60,000 in a year. This can be put in one lumpsum or a maximum of 12 monthly installments, but it should be in multiples of Rs 5. In fact, you can use the PPF account as a recurring deposit by making it a point to put aside a fixed amount from your income every month. Unlike a bank recurring deposit, you don't need to put the same amount every month.

Since the amount invested will vary month-to-month and year-to-year, how is it computed?
The rate of interest will be calculated on the lowest balance in the account between the close of the fifth day and the end of the month and will be credited to your account at the end of the year. So, to get the maximum out of your investment, deposit the amount in the first few days of the month.

What if I am desperately in need of funds?
Then you can opt either for a partial withdrawal (only one a year) or take a loan on your PPF account. A second loan can be taken only after the first is totally repaid.

Can I do both simultaneously?
No. You can take a loan only after two years from the end of year in which the initial subscription was made. A partial withdrawal is permissible only from the fifth year from the end of the year in which the initial subscription was made. For all practical purposes, it means from the seventh year onwards.

How expensive is the loan?
Very cheap. If you manage to repay the principal within 36 months, you are subject to just 1 per cent per annum as the rate of interest. In case you fail to repay it by then, it goes up to 6 per cent per annum. But this rate of interest is payable out of your non-taxable income.

Up to what limit is the loan sanctioned?
Up to 25 per cent of the balance to your credit at the end of the second year immediately preceding the year in which the loan is applied for.

Up to what limit is partial withdrawal permissible?
An amount not exceeding 50 per cent of the amount that stands to your credit at the end of the fourth year, immediately preceding the year of withdrawal, or at the end of the preceding year -- whichever is lower -- less the amount of loan, if any, which still has to be repaid.

For how long can I maintain my PPF account?
Though it says 15 years, it actually works out to be a 16-year period since an individual is allowed to make his last contribution in the 16th financial year. Even if the contribution is made on the last day, the tax rebate still holds though no interest on the amount will be earned.

What about continuing with my account after this period?
Sure, but at a block of five years. And, you can continue extending this in five-year blocks till it touches 30 years.

Do these extensions require me to continually invest?
No. If you merely retain your balance, it will earn the 11 per cent as interest until withdrawal.

What if I want a withdrawal during the extension period?
If you are just retaining the balance in your account, you can withdraw the entire sum in one or more installments at the commencement of each extended period. However, not more than once a year. If you have been continuing with fresh subscriptions, then you can withdraw up to 60 per cent of your balance at the commencement of each extended period in one or more installments, but not more than once a year.

Do I have to notify the bank about my PPF account being extended?
Yes. The Central Board of Direct taxes has stipulated that after 15 years, the tax benefits under Section 88 will not accrue unless the option for continuance is exercised.

Where can I open up my PPF account?
At head post offices, selection grade sub-post offices, State Bank of India and its subsidiary banks, and selected branches of nationalised banks.

Also see

PPF calculator

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