Saturday, March 1, 2014

Pros and Cons of Public Provident Fund (PPF) Account for Tax Saving

If you are an Indian, I am sure you must have heard about Public Provident Fund or PPF, one of the most popular long-term saving scheme backed by the government of India. If not about PPF, then definitely about EPF, Employee Provident Fund, it's big brother. Since EPF is sort of mandatory and your employer deduct some portion of your salary apart from his contribution, it's not something you worry about. By the way, if you want to check your EPF account balance, you can see it here. PPF investment is a similar product for any citizen of India through NRI can not open PPF account in India, it's only for residents of India. PPF allows you to save some money, reduce your taxable income and grow your investment with safety guarantee from the government on India. It also gives you a decent interest rate of 8.7% per annum, compounded annually.


Though interest rate is subject to change and decided every year in the month of April, you can be sure that you will get a decent rate from next 15 years given grown potential India has. Ironically, many people in India doesn't know much about the public provident fund or PPF, they know a little bit about it but never bother to go beyond that and open a PPF account, forget about investing money regularly. Only salaried employee make that effort to save money and plan for future.

 By the way time is changing, and we are living in high inflation era where cost of living, education are gone up multiple times in last 10 years. This huge cost increase forces people to plan about big ticket items like children's eduction, daughter's marriage, and their own retirement plan. PPF is a investment product which can be used to full fill any of above goal.


After last article about choosing between PPF and Fixed deposit, I got lot of emails asking question like I am self employed can I invest in PPF, Can I open a PPF account in my daughter's name, how can I invest more than 1 lakh in public provident fund account etc. This prompted me to list down some important details of PPF account in India. In this article, you will know some details of this excellent long term investment option available only to resident Indian.



Public Provident Fund or PPF Account

Before investing in PPF or opening an online PPF account with SBI or ICICI, you should know about some basics details. These 10 points will help you to know about PPF and help you in your decision to invest money on public provident fund account.


1) Eligibility criterion to open PPF account
Public provident fund scheme is open to Indian resident individuals and the account can also be opened on behalf of the minor child as a natural / legal guardian,  on behalf of HUF (Hindu undivided family), on behalf of an association of persons or a body of individuals. NRI can not open a PPF account on his name, but if his parents are living in India, then he can open on behalf of them.


2) Minimum and maximum investment amount
The minimum amount you can invest into PPF is Rs.500/- and the maximum is Rs. 100,000/- per annum. You can invest this amount at one time or instalments. By the way number of instalments in a financial year should not exceed 12. Financial starts from April and ends on March next year. If you invest more than maximum amount in PPF, which is 1 lakh, the excessive amount will not generate any interest rate. Another important thing to note while making PPF contribution is to deposit money before 5th of the month because then it will fetch interest for that month. If money is deposited after 5th then there will be no interest on that month, which means 25 days without interest. Be more careful if you are depositing money via cheque, because in that case your cheque must be realized before 5th of the month.



3) Maturity or Locking Period
PPF is a long-term investment option. Minimum period of PPF account is 15 years and can be extended in a block of 5 years. Which means, you can not withdraw money until maturity period, barring special cases of partial withdrawal. After 15 years, if you don't need money immediately, you can leave your amount there and it will continue generating same rate of interest, but you can not make any fresh contributions or deposits until you extend it for another block of 5 years.


4) Rate of Interest
Presently, PPF account gives us to interest rate 8.7% p.a, which is also compounded annually. however, subject to change as per Govt. Notification from time to time. Generally, the rate of interest is announced in the month of April.


5) Withdrawal from Fund
As I said before, Public Provident Fund is a long-term investment vehicle, which means longer maturity and locking period for withdraws. Partial withdrawals are allowed only after the expiry of 5 financial years, but the entire amount can only be withdrawn after completion of 15 years. So make sure you invest money which you don't need in the short term. It's not necessary to invest 1 lakh, so suppose you need some amount for booking your flat, or some other purpose keep it aside in fixed deposits and only invest minimum amount which is Rs 500 to keep your PPF account active.


6) Loans
Another good thing about PPF account is that you can take loans. You can apply for loan after the expiry of one year but before the expiry of 5 years from the end of the year in which initial subscription or first deposit was made, a loan of 25% of the credit balance at the end of the second year immediately preceding the year in which the loan is applied may be availed of by the subscriber.



7) Nominations
One of the good financial habits is to keep nominee, whether it's fixed deposit, saving account or mutual fund, you should always nominate someone. PPF also allows nominations of one or more persons except in the account opened on behalf of the minors.


8) Premature Withdrawal
Remember, PPF is a long-term investment option, and there is no withdrawal is permitted before the expiry of 5 years.


9) Tax Benefit and Concessions
This is the single biggest reason why people invest in Public Provident fund accounts. Interest on PPF / withdrawal from the fund is exempted from Income tax and balance held in PPF account is also totally exempt from wealth tax. The amount you deposit on PPF, which can be up to 1 lakh is also exempted from income tax under section 80C. This can reduce your taxable income by 1 lakh and can save you from going into higher tax bracket. Deposits in the name of wife/minor children will also qualify for the deduction of section 88 of Income Tax Act, 1961. So always avail tax benefit and concession by depositing some amount on PPF account every year. By the way, if you are looking for more tax saving options, see here.


10) Maturity Amount
People always question about how much they will get after 15 years investing a certain amount in PPF. Well, it's easy to calculate maturity amount as you know the interest rate, but you don't need to even bother about that. There are sites like ratekhoj.com, which provides PPF Maturity amount calculator, which can be used to calculate maturity amount by entering how much you invest. For example, if you invest 1 lakh rupees every year for 15 years in PPF, given the interest rate of 8.7% per annum, you will get Rs. 3,117,275.68. Here is the complete statement of your PPF investment calculated by ratekhoj PPF calculator.

How to calculator PPF maturity amount India

You can see a detailed breakdown of how your money will grow in PPF. The rate of interest uses here is 8.7% per annum, but it is compounded annually, which means your principle amount will be increased by interest earned on every year. That's why principle amount is 1 lakh in the first year, but Rs. 108,700.00 in the second year, and Rs 226, 856.90 in the start of the third year. This calculator assumes that you invest a fixed amount of 1 lakh every year if you do a variable amount investment e.g. 1 lakh in the first year but only 50 thousand in next year, you can choose the second option in this PPF calculator to calculate your PPF maturity amount.

That's all about Public Provided Fund investment in India. I believe this is the minimum information every Indian should know about PPF accounts. Doesn't matter whether you are currently investing money on PPF or not, because I know you will definitely invest some amount on PPF sooner or later. It's one of the best long-term investment product in India, which offers attractive interest rate, stability and guarantee. You can be sure that your money will not be going anywhere, as it is backed by the government of India, it's not like a bank which can bust. Some curious people will say, what will happen if Indian government defaults? Well, I don't know, but if that happens there will be more things to worry.

1 comment:

  1. As per the latest budget 2016, EPF gains will be taxed now.

    Here are the main points:

    Only 40 per cent of EPF withdrawals are tax-free, unlike 100 per cent earlier.
    60 per cent of EPF withdrawal will be taxed as income if it is not invested in an annuity offered by an insurance company. However, the subsequent income stream from the annuity will be taxed.
    The new taxation will apply only to the corpus made with contributions to EPF account after 1st April. The current accumulated corpus, and its further accumulation, will not be taxed at all.

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