Most of the people think of Public Provident Fund (PPF) as a good tax saving instrument more than anything else. However, having a PPF account adds more values to financial planning than just taxing saving.
It is a good option for investors who want to invest money for a long period and get tax free and risk free returns. The returns can be reinvested in the PPF account to get more returns. Currently the rate of return on PPF is 8.6 % per year, which is compounded annually. The interest is calculated on the lowest balance in the account between the close of the fifth day and the last day of every month. Contributions to the account can vary from a minimum of Rs 500 to a maximum of Rs 100,000 on a yearly basis. A PPF account holder who becomes an NRI during the tenure of maturity period also has the option to continue to subscribe to the fund till its maturity.
The tenure of the PPF account is 15 years, which can be extended in blocks of 5 years for any number of blocks. The extension can be with or without contribution. When one continues with such fresh subscription, he/she can withdraw up to 60% of the balance to his credit before the commencement of the extended period.
Some aspects of PPF
Investors need to look at PPF as a long term investment as it has the Power of Compounding. This means the returns just keep getting better with the number of years for which the investment is made. One is the best ways to invest in PPF is to invest a monthly basis. An investor can invest in a PPF account through monthly ECS in a SIP basis. This reduces the overhead expenses for the investor to visit the bank in order to deposit the funds into your PPF account and also bring in a disciplined approach to the investment.
PPF account gives interest on minimum balance in the PPF account between 5th of the month and the end of the month. So it is recommended that the investor makes the payment into PPF account before the 5th of the month.
As PPF is a 15 year product, most of the people feel that it is cannot be liquidated in case of emergency. However, there is an option to take the money out after completion of 7 years. One can take out 50 percent of the balance outstanding at the end of 4 years. There is also a provision to take loans on the amount that is invested in the PPF account.
If the PPF account-holder fails to maintain the minimum deposit of Rs 500 in a financial year, the account is considered as discontinued. However, the interest will continue to accrue and be paid at the end of the term. The account can be revived by the payment of a fee of Rs 50 for each year of default. The arrears of subscription of Rs 500 for each such year also has to paid.
Differences between PF (Provident Fund) and PPF (Public Provident Fund)
EPF (Employee Provident Fund) /PF is a retirement benefit scheme that is available to salaried employee. PPF (Public Provident Fund) is not a retirement scheme.
The amount of investment that can be made into PF (Provident Fund) is decided by the government. Currently it is 12% of an employee’s basic salary. An employee does have the option to invest more than the stipulated amount. On the other hand PPF (Public Provident Fund) is more of an investment scheme which can be opened in any nationalized bank and selected post offices. The minimum amount to be deposited in a PPF account is Rs 500 per year. The maximum amount can be deposited every year is Rs 70,000.
Investments in PF and PPF are eligible for deduction under the Rs 1, 00,000 limit of Section 80C. In PF withdrawal before completion of five years is taxed whereas in PPF there is no such taxation on maturity.
Both in EPF and PPF there is Premature Withdrawal and Loan Facilities available. In EPF, Premature Withdrawal is allowed only for the Daughter’s Wedding or for Buying a Home. For PPF, loan can be taken from the third year of opening the account onwards up to the sixth year.
How to transfer PPF account to another post office or bank
An investor can easily transfer his account from the post office or bank where it is held to another post office or other branches of the same bank or other authorized banks. A written application for the transfer needs to submit an application to the bank or post office where the investor currently has his PPF account. This has to be accompanied with the transfer form (SB10-b) after filling it in. This application has details of the account, the names and addresses of the post office or bank where the PPF account is currently held and the location to which the PPF account is to be transferred. After this the signature of the account holder is verified and the old bank or post office closes the PPF account.