PPF – Public Provident Fund
Public provident fund – PPF Scheme 1968 continues to be a favorite saving avenue for several years. This is mainly because principal and interest earned have a sovereign guarantee and the returns are tax-free. The principal invested qualifies for tax benefit under section 80 C of income tax act 1961 and interest is tax-free under section 10.
With interest rates on taxable fixed income investments coming down, PPF remains a suitable alternative for allocating debt portion of one’s investment portfolio. Allocation to equities through diversified equity mutual funds is equally important, especially when the goals are at least seven years away.
PPF is a 15 years scheme and can be extended in a block of 5 years. It can be open in a post office or bank branch. Some banks are now offering the online facility to open PPF account. One can migrate PPF A/c. From bank to post office and vice versa. A person who is having EPF account can also open PPF account.
One can deposit a maximum 12 times in a year with a total maximum allowable limit of ₹ 150000. Ensure you deposit money before 5th of the month to get full month interest for that month.
As the tax saving season is on, you may want to open PPF A/c. Here are few things you should consider before opening PPF account.
The effective rate of return
PPF is a debt oriented asset class. Which gives you low but safe returns as compared to return on equity. The rate of return is reviewed and declared by government every quarter. Currently, it is 8% until March 2017. As the interest earned is tax-free, effective earning is 8.9% | 10% | 11.5% for tax bracket of 10% | 20% | 30% respectively.
One can deposit minimum ₹ 500 and maximum ₹ 150000 in a financial year. There can be maximum 12 transactions allowed during the prescribed period. One can open PPF A/c. In own name or in the name minor of whom he is the guardian. The limit mentioned above is a combined limit of own and guardian.
Number of accounts
An individual can open only one account in his or her name. It can be opened in a bank or post office. If two accounts are opened by mistake, the second account is considered as irregular account and doesn’t qualify for any interest and tax benefit on the amount deposited. A person has to get both accounts merged with the approval of the ministry of finance.
Unlike in past when only loan and partial withdrawal was allowed, now even premature closure of an account is possible. However, the same is allowed only after complication of five years and on the specific ground like urgent ailments of family members or children’s education and so on. For this one has to produce legitimate documents from the competent authority.
Please remember PPF account opening form doesn’t contain nomination details, it has to be filled separately and submitted to the bank or post office. This is to be done to avoid any legal hassle for the nominee later on.
PPF account it is attached to a court and hence debtor cannot claim PPF account to recover a debt. However, the income tax department has the power to attach PPF account under any order.
To sum up…
PFF suits those investors who do not want volatility in returns akin to equity asset class. But, for long-term goals, it is better to take equity exposure, preferably through equity mutual funds, including ELSS tax saving fund.