Heard about Public Provident Fund (PPF), but don’t know much about it? For details, have a look at the explanation.
WHAT IS PPF?
Much known as Public Provident fund, PPF a savings instrument introduced by the ministry of finance in India which also helps in tax savings. In 2015 this scheme is more than 45 years old and is still among the top financial instruments used for tax planning. PPF is a success not only because it provides decent returns on investment but the money invested also gives tax benefits. The returns are usually higher than what the Fixed Deposits offer. It is a Long Term Debt Instrument of Indian Government. Post Offices as well as some Banks gain the authority to access PPF accounts.
Eligibility
- A person needs to be ROI (Resident of India)
- Non Resident Indians (NRI’s) cannot advance money in Public Provident Fund.
- Minors are eligible to open an account by their legal guardian.
- PPF account can not be opened under the name of HUF (Hindu Undivided Family)
Documents Required
- Pan Card copy
- Form A (Opening Form)
- Passport size photo
- Any residential proof
Investment Amounts
The minimum and maximum limit every year for investing in public provident fund is INR 500 & 1.5 lakhs respectively, deposits may be made in monthly installments (max 12/year) or in one go. Any deposits above the specified amounts will not fetch any interest income. Failure to deposit 500 INR would make you liable for a penalty.
Interest Rates and Other Benefits
RBI declares the Interest Rate every year in March. For 2014-2015 this is 8.70%, which was exactly the same as previous year.
It is advisable to invest money in this account before 5th of each month to gain maximum returns, as the interest is calculated on the least balance from 5th to the last of month. Therefore, it is desirable to deposit additional sum before time to earn additional benefits.
Also the entire sum of 1.5 lakhs can be advanced before 5th April to earn interest on the entire amount for the whole year.
Duration, Loans & Transfers
From the day a PPF account starts, it’s accessible till 15 years. After 15 years, the tenure ends. On the expiry date, the money can be withdrawn.
Also, the account holder can opt for extension of account up to a maximum of 5 years with adherence to certain terms and conditions.
Loans are available to individuals from third financial year itself. All such loans are to be reimbursed within months. disbursed amount can not be more than 25% of balance at the end of 2nd immediately preceding year. If you have paid the first loan successfully and you are between 3rd and the 6th year you may be available for a 2nd loan.
The accounts of individuals can be easily transferred to Post Offices or other Bank Branches free of charge.
Benefits Regarding Tax
Such benefits come under SEC 80(c) of IT ACT. The amount deposited in PPF account, is divided into two parts.
- PRINCIPAL AMOUNT which is the total sum which you invested
- INTEREST AMOUNT which is the benefit you will get on the above investment
Tax benefit includes benefits on both the amounts, up to a maximum of INR 1,50,000
ON PRINCIPAL AMOUNT
This amount can be reduced from the actual Income Tax amount of that year. The sum so arrived is liable for tax payment. It can also be reduced from Wealth Tax.
ON INTEREST AMOUNT
The return, in form of interest is tax-free. No tax formality is incurred on the interest amount.
Policies Governing PPF
- Only one account is accessible by an individual. Except in case of minor, if second account of a person is disclosed, the principal amount will be handed over back to him but the interest thereupon will be cancelled.
- A PPF account is not a joint account. A nominee can be selected, who will be benefited after the death of account holder.
- In case, no nominee has been appointed, the benefits will be given to the legal heir’s of the deceased account holder.
PPF Disclaimer
- By default, the PPF account will be deactivated, if no investment is made in the whole year.
- A penalty of 50 INR is to be borne by the account holder for again activating the account along with 500 INR for the inactive year.
- The deceased account cannot be continued by the nominees.
- The identity of legal heirs or nominees is just in case the balance in deceased account exceeds 1.5 lakhs.
PPF Vs Some other Schemes
Tax Savings Fixed Deposit
- PPF and Tax Savings Fixed Deposit both are deductible incomes.
- But the tenure of Tax Savings Fixed Deposit is 5 years, which is less when compared to PPF.
- Even the benefit earned on Tax Savings Fixed Deposit is taxable which is the reverse of PPF.
National Savings certificate
- Both schemes include deposits made in Post Office or Bank Branches.
- NSC is a scheme which involves deposit only once whereas PPF requires deposit every year.
- The tenure of NSC is 5-10 years whereas that of PPF is 15 years.