The Public Provident Fund is a popular Scheme or an investment option established by the Indian government through the Ministry of finance in 1968. The scheme is one of the most viable finance-related schemes introduced by the Central government with 15 years tenure. The scheme offers a mouth watery interest rate and a high return on investment (ROI).
The high point of the PPF scheme is that the interest rate is tax exempted, meaning you won’t pay any form taxes participating in this investment Scheme. As an investor, the minimum and maximum amounts you can invest in a year are Rs. 500 and Rs. 1, 50,000 respectively. The PPF scheme also offers incentives such as withdrawals, loans, as well as account extension.
In view of the benefits this investment option offers to the Indian citizens, this article will take a look at its tax benefits and returns. Therefore, ride with us as we explore this important investment option.
WHAT IS A PUBLIC PROVIDENT FUND (PPF)?
The PPF scheme is an Indian government-powered long-term investment option which yields a good interest rate. The interest rate is tax-free. The ROI on the PPF scheme is a lot higher than the regular returns on fixed deposits in the bank. Any person can open a PPF account, whether a salaried or self-employed.
WHO IS ELIGIBLE TO TAKE ON THE PROVIDENT FUND (PPF)?
It is not out of place for you to wonder whether you are qualified to fire a shot in this investment option by the government. The following are the eligibility criteria to open an account in the PPF scheme:
- Beneficiaries must be an Indian resident to participate
- A legal guardian can open the account for a minor
- Beneficiaries can only maintain one account under their name
- Indians living in diaspora are not qualified to participate in the PPF scheme. However, an Indian who travels abroad after investing in the scheme would continue to enjoy the scheme on the basis of non-repatriation until the maturity period.
HOW TO OPEN A PPF ACCOUNT?
In order to participate in the PPF scheme, you will open an account under the scheme. You will visit any of the participating banks or the closest post office near you.
Once you get to the bank or post office, you will fill the account opening form and submit with the attachment of the following documents:
- Means of Identity (Voters’ card, driver’s license or passport)
After successfully opening the account, a passbook will be issued to you. The passbook will record all your transactions like loans, withdrawals, interest accrued, and subscriptions,
PPF RETURNS AND INVESTMENT–
In order to maintain the PPF account, the minimum and maximum amount you can invest in a financial year are Rs. 500 and Rs. 1,50,000 respectively. Investors in the scheme can either deposit funds on an installment basis (in Rs. 100) or full deposit. The number of time to make an installment deposit in a given financial year is 12 times. As for withdrawals, the date on the cheque must be the clearance date and not the presentation date.
Every deposit to the PPF account should be in cash or draft or crossed cheque in the account office’s favour. In addition, online money transfer is also acceptable.
It is within the purview of the Indian government to fix the interest rate. As an investor in the scheme, you will earn an interest rate of 7.60% per annum which is the rate as of 01.01.2018. Up until March 2010, deposited cheques were cleared for interest payment even those that were issued on the 5th of that month.
CONTINUATION OF THE SCHEME AFTER THE 15 YEARS MATURITY PERIOD
As earlier stated, the duration for the PPF scheme is 15 years. The current account balance as of the maturity period can be withdrawn. You can also open a new account on the expiration of an existing PPF account. However, withdrawals are not allowed immediately after opening an account until after the first seven years. After seven years, you will be able to withdraw up to 50% of the deposit.
After the maturity period, account holders can extend the validity period for another 5 years in a block. Interest on the account will continue at a normal rate until such a time the account holder decides to close the account. In the event that an account holder extends the account without making further deposits, withdrawals will still be possible without any form of restrictions. Please, be informed that only one withdrawal is permissible within a financial year.
NOMINATION AS THE PER PPF SCHEME
Under the PPF scheme, a nomination is permissible. However, in a joint nominee, the benefits shall be allocated to each nominee.
LOANS AGAINST PPF-
Account holders can avail loans under the PPF scheme. The condition of accessing loan is that the account must be at least 3 years old excluding the year the account was opened. The eligible amount to be accessed by an account holder shall not be more than 25% of the total account balance as at the year before the loan application year.
Account holders cannot apply for a fresh loan if a previous loan is still effective. If the loan is repaid within 36 months, the interest rate to be paid on the loan is 2%, but once it exceeds 36 months, the interest rate would be 6%. The loan repayment can be in instalments or in a lump sum.
The minimum amount to be deposited in the PPF scheme is Rs. 500. The present interest rate is 8.7%. The rate is determined by the government and it is tax exempted. The maximum amount an account holder can deposit is Rs. 1,00,000. Please be informed that the interest earned is compounded and wealth tax is exempted from the accumulation of balances. The risk level is very low since it is powered by the government.
PPF ACCOUNT WITHDRAWALS
The total account balance can be withdrawn only when the account hits its maturity period (after 15 years of opening). However, the government in their wisdom understands that some account holders might face a financial crisis, they made provision for partial withdrawals, although subject to some limits. Withdrawals are not allowed immediately after opening an account until after the first seven years. After seven years, you will be able to withdraw up to 50% of the deposit.
PPF REVIVAL AND DEFAULTS
In the event that an account holder fails to deposit a minimum of Rs. 500 in a year, the account would be discontinued. Loans and withdrawals are not possible once the account is discontinued. However, interest payable will continue until the maturity period of the account. To reactivate the account, an account holder must pay a yearly fine of Rs. 50 for the number of years the account was dormant in addition with the (Rs. 50) arrears so incurred.
Below are the tax concessions for the PPF account:
- No tax shall be paid on the interest earned.
- All PPF investments are eligible for deductions with respect to 80C.
DEMERITS OF INVESTING IN PPF
One major problem faced by the PPF scheme is the issue of insufficient Liquidity. Withdrawals are only possible from the 7th year onward. Loans are also possible after 3 years of operating the account. So, the problem of Liquidity is a great issue facing this novelty scheme.
Secondly, another issue is the inflation policies of the government and currency debasement. The scheme would not insulate investors from inflation.
INTEREST RATE FROM 1986 TILL DATE
|April 1st, 1986 – January 14th, 2000||12%|
|January 15th 2000 – February 28th, 2001||11%|
|March 1st, 2001 – February 28th, 2002||9.5%|
|March 1st, 2002 – February 28th, 2003||9%|
|March 1st, 2003 – November 30th, 2011||8%|
|December 1st, 2011 – March 31st, 2012||8.6%|
|April 1st, 2012 – March 31st, 2013||8.8%|
|April 1st, 2013 onward||8.7%|
|January to March, 2016||8.7%|
|April to June, 2016||8.1%|
|July to September, 2016||8.1%|
|October to December, 2016||8.0%|
|January to March, 2017||8.0%|
|April to June, 2017||7.9%|
|July to September, 2017||7.8%|
|October to December, 2017||7.8%|
|January to March, 2018||7.6%|
|April to June, 2018||7.6%|
|July to September, 2018||7.6%|