Public Provident Fund (PPF) is the Best Tax saving as well as Investment Scheme sponsored by the government of India. PPF is the scheme for every kind of Investor. In fact, PPF has several advantages. This Article is all about the Detailed Description of PPF, its Pros & Cons and How to Invest in PPF.
Key Features of PPF –
- The Public Provident Fund Scheme is a statutory scheme of the Central
Government of India.
- The Scheme is for 15 years.
- The rate of interest is 8.8% compounded annually.
- The minimum deposit is 500/- and maximum is Rs. 1,00,000/- in a financial year.
- One deposit with a minimum amount of Rs.500/- is mandatory in each financial year.
- The deposit can be in lumpsum or in convenient installments, not more than 12 Installments in a year or two installments in a month subject to total deposit of Rs.1,00,000/-.
- It is not necessary to make a deposit in every month of the year. The amount of deposit can be varied to suit the convenience of the account holders.
- The account in which deposits are not made for any reasons is treated as discontinued account and such account can not be closed before maturity.
- The discontinued account can be activated by payment of minimum deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year.
- Account can be opened by an individual or a minor through the guardian.
- Joint account is not permissible.
- Those who are contributing to GPF Fund or EDF account can also open a PPF account.
- A Power of attorney holder can neither open or operate a PPF account.
- The grand father/mother cannot open a PPF behalf of their minor
- The deposits shall be in multiple of Rs.5/- subject to minimum amount of Rs.500/-.
- The deposit in a minor account is clubbed with the deposit of the account of the Guardian for the limit of Rs.1,00,000/-.
- No age is prescribed for opening a PPF account.
- Interest is not contractual but rate is notified by Ministry of Finance, Govt. of India, at the end of each year.
- The facility of first withdrawal in the 7th year of the account subject to a limit of 50% of the amount at credit preceding three year balance. Thereafter one Withdrawal in every year is permissible.
- Pre-mature closure of a PPF Account is not permissible except in case of death.
- Nominee/legal heir of PPF Account holder on death of the account holder can not continue the account, but account had to be closed.
- The account holder has an option to extend the PPF account for any period in a block of 5 years on each time.
- The account holder can retain the account after maturity for any period without making any further deposits. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed.
- One withdrawal in each financial year is also admissible in such account.
- The PPF scheme is operated through Post Office and Nationalized banks.
- PPF account can be opened either in Post Office or in a Bank.
- Account is transferable from one Post office to another and from Post office to Bank and from Bank to Post office.
- Account is transferable from one Bank to another bank as well as within the bank to any branch.
- Deposits in PPF qualify for rebate under section 80-C of Income Tax Act.
- The interest on deposits is totally tax free.
- Deposits are exempt from wealth tax.
- The balance amount in PPF in PPF account is not subject to attachment under any order or decree of court in respect of any debt or liability.
- Nomination facility available.
- Best for long term investment.
Pros & Cons of PPF –
The advantages of the Public Provident Fund – PPF (Pros)
– Lowest Risk than any other Government or private sector schemes in India
– Tax Benefits – You are eligible for tax rebate under Sec80C. The Maximum you can invest is Rs1,00,000
– Great Returns – 8.7% Compounded Annually (changes from time to time – generally once in a year)
– No Tax on Interest Earned – This is perhaps the great feature. Unlike other Schemes, the Tax on Interest earned from PPF is NIL,
– Flexibility of Investment – You can invest from Min. Rs.500 per annum to Maximum Rs.1,00,000 per Annum by this Scheme.
– Exempt from All Wealth Tax – The Corpus accumulated under PPF is exempt from all types of Wealth Taxes.
The Disadvantages of the Public Provident Fund – PPF (Cons)
– The Interest rate keeps changing – The main problem with PPF is that, the interest rate keeps changing according to the government policy. Once upon a time (In 80s), the interest rate from PPF was as high as 17% per annum. The Government has gradually reduced the interest rate to 12%, 10%, 9.5% and today it is 8% only.
– Long Lock-in Period – The Long lock-in period of 15 years is another disadvantage. Because if one have to put aside money fro 15 Full years than why to go for Fixed return Instruments? Instead of that why not go for Equity because in the long run (More than 10 years), the risk from equity becomes almost ZERO.
– Lack of Liquidity –
Your money is stuck for years on end. It is not as easy as selling some shares or mutual fund units.
How to make this work for you: Take a loan from the third year of opening your account to the sixth year. So if the account is opened during the financial year 1997-98, the first loan can be taken during financial year 1999-2000 (the financial year is from April 1 to March 31).
The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. In this case, it will be March 31, 1998.
If you repay the loan in 36 months, interest will be charged at 12% pa. Otherwise, interest will be charged on the outstanding sum at 6% per month. You can obtain a second loan before the end of the sixth financial year if the first one is fully repaid.
You can make a partial withdrawal only after five financial years are completed from the end of the year in which the initial subscription was made. So, in effect, it works out from the seventh year onwards.
The amount of withdrawal is limited to 50% of the balance in your account at the end of the fourth year immediately preceding the year in which the amount is to be withdrawn; or at the end of the preceding year, whichever is lower.