It requires just Rs 100 to start a PPF account
PPF accounts could be opened by individuals, whether salaried or self employed, with a minimum initial deposit of just Rs 100. Accounts could be opened at any branch of the State Bank of India (SBI) or branches of its associated banks.
Other nationalized banks which offer this service are Bank of India, Central Bank of India and Bank of Baroda.
The general post office too allows opening of a PPF account. Individuals may also open a PPF account on behalf of a minor child of whom they are the guardians.
PPF accounts have a minimum and maximum deposit limit
A minimum deposit of Rs 500 must be made during one whole financial year.
The maximum that could be deposited is Rs 70,000 in a financial year. Deposits could be in either one go, or in flexible installments (in multiples of Rs 10). You could vary the amount and the number of installments, as per your convenience, provided you do not exceed 12 installments in one financial year.
Failing to deposit the minimum requirement, would lead to your account being discontinued. Interest would however continue to accrue. You could regularize the account again on paying the prescribed default fee along with subscription arrears.
What kind of income can one expect from PPF?
The returns from the fund are in the form of interest paid. The interest rate currently is 8 per cent compounded annually.
The interest, however, is not paid out but is compounded (like a bank recurring deposit) till the maturity or withdrawal.
What is the risk involved with this investment?
There is hardly any risk for the capital or the returns from the PPF deposit.
The risk, however, is with inflation, which could possibly reduce the value of the returns in the long-term, and the other disadvantage is the long lock-in period of 15 years.
How about liquidity of the investment?
PPF gives very little liquidity, too. The fund, as mentioned earlier, is for a minimum of 15 years. This can be extended for a further period of 5 years each, indefinitely.
The liquidity is in the form of withdrawals, which can be made from the fund from 7-year onwards.
Interest calculation in PPF account
The interest rate in your PPF account is calculated on the lowest balance between the fifth and the last day of the month. So to maximize your earnings, try making deposits between the 1st and the 5th of the month.
Interest is compounded annually and credited on March 31 each year.
PPF offers multiple tax benefits
Deposits in a PPF account qualify for a deduction under section 80C. Furthermore, the entire maturity amount including the interest is non-taxable. Not only is the interest earned tax free, PPF deposits are exempt from wealth tax too.
Premature withdrawal from PPF
The entire amount in your account could be withdrawn only on maturity. However, in times of financial crises partial withdrawals are permitted subject to certain ceiling limits.
You could withdraw once a year, from the 7th year onwards. Such withdrawals, must not exceed, 50 per cent of the balance at the end of the fourth year, or 50 per cent of the balance at the end of the immediate preceding year, whichever is lower.
Pre-mature closure of a PPF account is permissible only in case of death.
Need a Loan? Use your PPF
You could take a loan on your PPF deposit, subject to certain terms and conditions.
Loans could be taken from the third year onwards till the sixth year. Up to a maximum of 25 per cent of the balance at the end of second immediately preceding year would be allowed as loan. Such withdrawals are to be repaid within 24 months.
Rate of interest charged on the loan would be 2 per cent more than the PPF interest rate prevailing then.
A second loan could be availed as long as you are within the third and the sixth year, and only if the first one is fully repaid. Also note that once you become eligible for withdrawals, no loans would be permitted.
Inactive accounts or discontinued accounts are not eligible for loan.
Continuing PPF after the 15 year period
PPF account holders have an option of extending their accounts after the 15 year tenure with or without further subscription, for any period in a block of five years. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed.
In case the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year.
If you continue the account after 15 years, with continued deposit, withdrawal up to 60 per cent of the balance at the beginning of each extended period (block of five years) is permitted.
How is PPF treated for tax?
This is where the PPF scores very high. Currently, The PPF comes under the Exempt- Exempt- Exempt category.
This means that the amount invested gets tax benefits, the interest is not taxed and this applies for the final maturity amount as well.
The investment gets benefits under Section 80C of the IT Act. The investment, however, is limited to a maximum of Rs 70,000 per year per person.
This limit of Rs 70,000 includes the deposits made in the name of any dependent children.
Note:For people in higher income brackets (basic salary of over Rs 8.3 lakh), the employee provident fund (EPF) itself covers the permissible limit of savings, thus investment in other instruments is not necessary.
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