Public Provident Fund (PPF) - Tax benefit and Returns

Public Provident Fund (PPF) - Tax benefit and Returns 

 What is a PPF account? :

Public Provident Fund(PPF) scheme is a long term investment option that offers an attractive rate of interest and returns on the amount invested. The interest earned and the returns are not taxable under Income Tax. One has to open a PPF account under this scheme and the amount deposited during a year will be claimed under section 80C deductions.

How to open a PPF account? :

A PPF account can be opened with either a Post Office or with any nationalized bank like the State Bank of India or Punjab National Bank, etc. These days, even certain private banks like ICICI, HDFC and Axis Bank among others are authorized to provide this facility. You need to submit the duly filled application form along with the required documents i.e. the KYC documents like identity proof, address proof, and signature proof.

What is the interest rate on PPF? :

The current interest rate is 8%that is compounded annually. The Finance Ministry sets the interest rate every year, which is paid on 31st March. The interest is calculated on the lowest balance between the close of the fifth day and the last day of every month.

Essential features of PPF :

• Investment Limits: PPF allows a minimum investment of Rs 500 and a maximum of Rs 1.5 lakh for each financial year. Investments can be made in a lump sum or in a maximum of 12 installments.

• Opening Balance: The account can be opened with just Rs 100. Annual investments above Rs 1.5 lakh will not earn interest and will not be eligible for tax saving.

• Deposit Frequency – Deposits into a PPF account has to be made at least once every year for 15 years.

• Mode of deposit – The deposit into a PPF account can be made either by way of cash, cheque, Demand Draft or through an online fund transfer.

• Nomination – A PPF account holder can designate a nominee for his account either at the time of opening the account or subsequently.

• Joint accounts – A PPF account can be held only in the name of one individual. Opening an account in joint names is not allowed.

• Risk factor –  Since PPF is backed by the Indian government, it offers guaranteed, risk­-free returns as well as complete capital protection. The element of risk involved in holding a PPF account is minimal.

PPF defaults and revival

If the PPF account holder fails to deposit the minimum of Rs.500 in a given financial year, the account is considered to be discontinued and also loans and withdrawals are not allowed. However, the interest will continue to accrue, to be paid at the end of the term. This account can be revived on payment of a fee of Rs 50 for each year of default, along with the arrears of subscription of Rs.500 each such year.

PPF tax concessions

1. Benefit u/s 80C – The Investments made in PPF Account are eligible for deduction u/s 80C

2. Tax-Free Interest – No Tax is payable on the Interest Earned on PPF Account.

Disadvantages of PPF

The problem with PPF is its lack of liquidity. One can withdraw the investment made in 1st year only in the 7th year. However, loan against investment is available from 3rd financial year. If liquidity is not an issue, you should invest as much as you can in this scheme before looking for other fixed-income investment options.

The second problem is the debasement of currency and government inflation policy as PPF unlike physical assets will not cover a person for inflation.