Friday, August 24, 2012

Public Provident Fund (PPF) De-Mystified


Public Provident Fund or PPF as it is more commonly called has been the staple investment avenue for thousands of Indians over the past two decades. Not only is it a good investment option, it also gives us tax benefits which makes it doubly attractive for an investor. We have covered the PPF as an investment option at a high level multiple times in this blog. Remember the articles covering Investments and Income tax like Best Tax Saving Options Available for Investment or Saving Income Tax through Investments?
The purpose of this article is to dive deeply into this great Investment Option. Lets get started!!!

What is PPF?

Public Provident Fund or PPF is a scheme that was introduced by the Government of India in the year 1980. Ever since that year, PPF has been a preferred choice for investment for the risk averse investor. Assured and Tax Free Returns make PPF even more attractive.

The PPF is just like the regular Provident Fund Account that salaried employees get throughout India. The only difference being, the PPF account can be opened by anyone and contributions can be made as per their preferences. The money saved in the PPF Account is backed by the Government of India and hence it is practically Risk Free. The money in the PPF Account earns interest just like the PF account which will be credited into our account by the Government.

What Makes PPF different from the Regular PF?

The Regular PF Account is available only for Salaried Employees in which case the contribution towards the PF Account will be made both by the Company where the person is working as well as the individual himself whereas, the PPF Account is available for anyone and everyone. It is available even for self-employed professionals or businessmen. The other difference is that, the contribution towards the account is made only by the investor and no one else.

Why Choose PPF?

There are multiple reasons as to why we must choose PPF as an investment option. Some are:
a. The Returns are Tax Free
b. The Money is backed by the Government of India. So, it is totally safe
c. The Investments made are exempt from Income Tax under Sec 80C (Up to 1 lakh per year)
d. One can open a PPF account in any bank or post office. Some banks even give us online options to open PPF Accounts through Internet Banking.
e. The Rate of Interest offered is very good. The current rate is 8.6% which is very good. The average rate of interest offered is around 8% which makes it above average returns for the risk averse investor.

If an investor contributes 1 lakh every year for 15 years, he will be left with around 31 lakhs at maturity (If the rate of interest goes at around the same 8.6% range). Your money has doubled at the end of 15 years which is amazing considering the fact that the money is totally safe and tax free.

Trivia:
If we consider the Tax Benefits that an investor will gain by investing in PPF along with the returns offered by PPF, the Returns work out to be more than 15% and would vary based on which tax slab the investor is in.

Some Key Points Reg. PPF Investment:
• PPF is a Long Term Investment Option (15 years Maturity)
• Maturity can be extended by an additional period of 5 years to make it a total of 20 years
• There is a minimum investment required every year (Rs. 500) to keep the account active
• There is an upper limit on the amount of money that can be invested every year (1 lakh) by an investor
• One Investor can have only one PPF Account. However, you can have one more in your spouse’s name without having to worry about tax liabilities even if the spouse is a home maker or has no income.
• If you have more the one PPF Account (In your own name), you need to close the others. When the other accounts are closed, there will be no Interest paid on the balance in the other accounts.
• Interest is earned on the PPF Account based on the minimum balance in the account between the 5th and the 30th of the Calendar month. So, if you contribute 10,000 towards your account on the 4th of this month, you will earn interest on it that month as well but if you invest on 6th, the 10,000 will start earning interest only starting next month.
• The interest is credited into our accounts annually (Once every year)
• Withdrawal is allowed once a year after the 6th year only and that too is only a % of your total balance. Full withdrawal is allowed only after the 15th year.
• PPF Accounts can be held or owned by only one individual. This is not like a bank account which can be jointly owned by two or more people
• The Balance in your PPF Account CANNOT be used as Collateral for loans that you may take
• Nominees can claim the balance in the PPF Account along with the interest accrued on the death of the account holder. The account has to be closed when the account holder dies.
• The PPF Account cannot be transferred from one person to another. Even in case of death of the account holder his/her nominee/legal heir cannot continue the account. They will be forced to close it.
• Loans are available against your PPF Money but the rate of interest has been hiked recently by the Government to discourage investors from dipping into their savings. The Government decides the Loan Rate every year just like the interest rate it pays to us.

PPF and Inheritance

We covered the concept of WILL and Legal Succession in one of our older post titled Have You Written Your WILL?. So, the question that arises now is what happens to the money in the PPF Account if the account holder died with no Nomination or WILL?

If the subscriber dies and there is no nomination at the time of death, the balance in the account, if it is up to one lakh, will be paid by the Accounts Office to the legal heirs of the deceased on receipt of application in Form G supported with necessary documents without the production of succession certificate. If the balance is more than one lakh, the production of Succession certificate will be necessary.
Verdict

In a Nutshell, the PPF account is a great investment option for anyone residing in India. If we consider the Tax Benefits that we may get out of the investments into the overall returns, the number stands at an astounding 15% or more which makes it one of the best debt investment options available in India. Contributing a good amount into our PPF Account every year can help us build a good Nest Egg for retirement.

So, if you do not have a PPF Account now and are reading this article, Please go ahead and open one for yourself and make investing in the PPF Account a disciplined activity every month or year. You will not regret the decision at all…
Happy Investing!!!

16 comments:

  1. My father is a nominee in his brother's PPF account in post office. His brother died recently. The post office is asking my father to come in person to claim the amount. My father, being bed-ridden due to old age, is unable to do so. How can he claim the amount then?

    ReplyDelete
    Replies
    1. First of all, you will need a doctor certificate to prove that your father will not be able to claim it directly. Secondly you will need proof that you are the legal heir of your dad. With these 2 proof's you should be able to claim the amount.

      Note: If your father has more than one kids, then you will need a consent form from your siblings allowing you to claim the proceeds of your uncle.

      You can also visit the nearest PPF office and inquire about your specific situation where you father is the nominee but is bedridden and cant visit in person. They will most probably tell you the exact procedure to make the claim. But, in all probabilities they will tell you bring the two proof documents that I just mentioned above.

      Anand

      Delete
  2. If nomination is there for PPF account, is there anything else required to do, so that the nominee can only get the money after the death of the original PPF Holder?

    ReplyDelete
    Replies
    1. Anonymous - A nominee cannot withdraw money from your ppf acc or any other investment for that matter until you are alive. So, dont worry.

      Delete
  3. Hi..I have a question abt ppf..r we going to get double the money of what we deposit in 15 years in ppf..

    ReplyDelete
    Replies
    1. No, I dont think so. PPF is a fixed returns instrument - you will get around 8 to 9% rate of returns. This double the money part is a rumor.

      Delete
  4. Hi Anand, I have moved internally from operation to technology in my current company. Is it possible to withdraw the old PF amount or it automatically merges?

    ReplyDelete
    Replies
    1. Anonymous - When you move internally your PF Account continues. You cannot Withdraw.

      Delete
  5. Hello Anand,

    If Mr. X is working for two different companies at the same time and withdrawing TDS from both the companies. and if now he has left his first company. what should be the next course of Action for PF Withdrawal or Transfer.

    ReplyDelete
    Replies
    1. Neha - firstly I dont think working for two companies at the same time and having two separate PF accounts is correct or legal. anyways, if you resign from a job, you should transfer your PF to the new pf account that will be opened for your new job.

      Note: The government is issuing universal pf account numbers to all pf holders and you will have to use that in future. Check out this article: http://anandvijayakumar.blogspot.com/2014/08/great-news-universal-account-number-for.html

      Delete
  6. Hi Anand, I have opened a ppf a/c at my home nearest sbi branch. but the address of ppf pass book is my office address,as i diposited the 1st amount by cheque from my office a/c. Will it be a problem in future? How can i change my address in ppf pass book? pls. reply.

    ReplyDelete
    Replies
    1. As long as you work in that company/address I dont think it will be a problem. However, if you want to change address, just take your address proof (Telephone bill/electricity bill/passport etc) and visit your SBI branch. There you can submit a written request to update your address.

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  7. Despite recent signs of rate cut for PPF ,is it good to invest in it,is it possible to go beyond 7%.Your help is needed on it to continue or not.

    ReplyDelete
    Replies
    1. Even if rate of interest is only 7%, PPF will still be a good investment and you cannot stop once you open an account. You have to keep investing each year to keep the account active.

      Note: If PPF Interest rate goes to 7% most likely other bank deposits will also be around that range only.

      Delete
  8. Hi ananda. I wanted to know what happens if for one year i dont deposit any money into the ppf account. Does the account becomes dormant? Do i have to pay some charge to get it back live ?

    ReplyDelete
    Replies
    1. Yes, it will become dormant but you can revive it by paying a small fee. See this article. Your question is answered in Question No: 40

      http://anandvijayakumar.blogspot.sg/2012/12/every-question-you-will-ever-have-about.html

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