Friday, 19 July 2013

Public Provident Fund (PPF) – Tax benefit and Returns

Eligibility -  Individuals who are residents of India are eligible to open an account under the Public Provident Fund scheme. A PPF account may be opened under the name of a minor by his/her legal guardian. However, each person is eligible for only one account under his/her name.

Non-resident Indians (NRIs) are not eligible to open an account under the Public Provident Fund Scheme. However a resident who becomes an NRI during the 15 years’ tenure prescribed under Public Provident Fund Scheme, may continue to subscribe to the fund until its maturity on a non-repatriation basis.


Investment and Returns -  A minimum yearly deposit of Rs. 500 is required to open and maintain a PPF account, and a maximum deposit of Rs.100000/ can be made in a PPF account in any given financial year. The investments can be made in multiples of Rs. 500, either as a whole sum, or in installments (not exceeding 12 in a year, though more than one deposit can be made in a month). The credit to the PPF account is made on the date of clearance of the cheque, not on the date of its presentation

Every subscription should be made in cash or through a crossed cheque or draft or postal order, in favour of the accounts office, at the place at which that office is situated. In case of any cheque, draft or postal order should be drawn at a bank or post office at that place. It is also possible to transfer funds online using net banking in a PPF account opened with SBI also NEFT Transfer from any bank is possible with sbi ppf accounts.

The government of India decides the rate of interest for PPF account. The current interest rate effective from 1 April 2013 is 8.70% Per Annum(compounded annually). Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month. Till March 2010, cheques deposited for clearing, up to 5th of the month were eligible for that month’s interest. Since 29 March 2010, only the amounts which are actually cleared on or before the 5th of the month are eligible for that month’s interest.

The minimum tenure of the PPF account is 15 years, which can be further extended in blocks of 5 years each for any number of blocks. The extension can be with or without contribution. An account holder, continuing with fresh subscription, can withdraw up to 60% of the balance to his credit at the commencement of each extended period in one or more installments but only once in a year.

Nomination facility is available. In the case of joint nominees, it is possible to allocate the percentage of benefits to each nominee.

Loans

Loan facility available from 3rd financial year up to 5th financial year. The rate of interest charged on loan taken by the subscriber of a PPF account on or after 01.12.2011 shall be 2% p.a. However, the rate of interest of 1% p.a. shall continue to be charged on the loans already taken or taken up to 30.11.2011.

Features

The public provident fund is established by the central government. One can voluntarily open an account with any nationalized bank or post office. The account can be opened in the name of individuals including minor.

The minimum amount is Rs.500 which can The rate of interest at present is 8.7% per annum, which is also tax-free. The entire balance can be withdrawn on maturity. Interest received is tax free. The maximum amount which can be deposited every year is Rs. 1,00,000 in an account. The interest earned on the PPF subscription is compounded. All the balance that accumulates over time is exempt from wealth tax. Moreover, it has low risk – risk attached is Government risk. PPF is available at post offices and banks.

Withdrawals from PPF account

There is a lock-in period of 5 years and the money can be withdrawn in whole after its maturity period. However, pre-mature withdrawals can be made from the end of the sixth financial year from when the PPF commenced. The maximum amount that can be withdrawn pre-maturely is equal to 50% of the amount that stood in the account at the end of 4th year preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.

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

Interest earned is fully exempt from tax without any limit. Annual contributions qualify for tax rebate under Section 80C of income tax. Contributions to PPF accounts of the spouse and children are also eligible for tax deduction. Balance in PPF account is not subject to attachment under any order or decree of court. But, Income Tax authorities can attach the account for recovering tax dues. The highest amount that can be deposited is 1,00,000. Tax bracket for PPF is EEE (i.e. Exempt,Exempt,Exempt). So contribution is exempted under 80C, Interest earned is tax exempted and withdrawal is also tax exempted

Disadvantages of PPF

The problem with PPF is its lack of liquidity. One can withdraw the investment made in 1st year only in 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.

Second problem is debasement of currency and governments inflation policy as PPF unlike physical assets will not cover a person for inflation, especially in the current economic scenario in 2013. Inflation has been substantially above the PPF interest rate for well over 5 years; as PPF Interest rate of 8.8 or 8.7% as at April 2013 is far below the double digit cpi inflation rate of 11% and way below the real inflation rate.
Interest rates over time

01.04.1986 to 14.01.2000………………………… 12%
15.01.2000 to 28.02.2001……………………….. 11%
01.03.2001 to 28.02.2002 ………………………. 9.5%
01.03.2002 to 28.02.2003 ……………………….. 9%
01.03.2003 to 30.11.2011………………………… 8%
01.12.2011 to 31.03.2012………………………… 8.6%
01.04.2012 to 31.03.2013………………………… 8.8%
01.04.2013 onward………………………………… 8.7%

Source- Wikipedia

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