The Public Provident Fund, or PPF, is a terrific tax break that every individual should take a look at. While we have heard a lot about its virtues, there are some basic facts to get right.
- Is the return fixed?
The return is assured but the exact amount keeps fluctuating.
The investor is assured a fixed return every year, though the exact figure varies. Earlier, the returns would be set every year. Now, to keep it more market aligned, it is reset every quarter according to the yield on government securities.
At one time, the instrument earned 12% per annum. At the turn of the century it dropped to 11% and went further down to 8%. It moved up for a while touching 8.8% before beginning a downward journey to 7.9%. The current rate is 7.6%.
- What is the tax break?
Investments in PPF are entitled to a tax exemption up to Rs 1,50,000 under Section 80C. What’s more, even the interest earned is tax free. The interest is added to the principal investment and compounded, and the accumulated amount is also exempt from tax on maturity. This makes it an EEE investment; which is an acronym for Exempt, Exempt, Exempt.
- Your investment is allowed for a deduction. So, you don’t have to pay tax on part of the income that equals the invested amount.
- You don’t have to pay any tax on the returns earned during the accumulation phase.
- Your income from the investment would be tax-free in your hands at the time of withdrawal.
- How many PPF accounts can you hold?
At any point, you are allowed to have only ONE PPF account in your name. If you are found to have more than one, the second account will be instantly deactivated.
There is no concept of a joint account between any two individuals, be it parents or spouse. You can nominate another individual but cannot hold a joint account.
You can open an account in the name of a minor child of whom you are the parent / guardian. However, that account will be on the child’s name and you are the guardian. And, in such a situation, the total contribution by any one single individual into any of these accounts cannot exceed Rs 1.50 lakh per financial year. If you have more than one child, you can open an account in each child’s name. However, the overall investment limit would still remain Rs 1.5 lakh.
In other words, the total limit of investment in PPF for each financial year is Rs 1.5 lakh, irrespective of the number of accounts you deposit this money into.
Also, only one of the spouses can open an account in the name of their child, so each child can have only one PPF account.
- How safe is PPF?
There are two aspects with regards to safety.
The first being an issue with any fixed return investment. Are you assured of the timely payment of interest and the return of the accumulated investment on maturity? Yes.
Any sovereign backed investment (which means it is issued by the national government of a country) stands for the highest safety. Since the funds in PPF are backed by the central (not state) government, the investment does not get any safer than this; the underlying assumption being that the government will not default on its payment obligation.
The second aspect is the immunity this investment garners.
As per Section 9 of Public Provident Fund Act, 1968, the amount in a PPF account cannot be attached under any decree or order of the court to recover any debt or liability incurred by the account holder.
However, there has been adequate debate as to whether the Income Tax Authority is free to attach and recover the dues of an account holder. A clarification by the Central Board of Direct Taxes stated that the above Section 9 applies only to attachment under a decree or order of a Court of Law and not to attachment by the Income Tax Authorities and Estate Duty Authorities. Which means that the amount standing to the credit of subscriber in his/her PPF Account shall be liable to attachment under any order of income tax authorities in respect of debt or liability incurred by the subscriber.
An interpretation has also emerged that as long as the amount remains invested in a PPF account, it would be immune from attachment for recovery of the tax dues. The situation may change as and when such amount is withdrawn and paid to the subscriber.
You can read more on the legalities of this subject at Taxguru.com, Are deposits immune from recovery of tax dues? and Taxvani.
- What is the investment limit?
Each financial year, a minimum of Rs 500 is needed to keep the PPF account active. On the other end of the pendulum, the annual investment cannot exceed Rs 1.50 lakh.
This is the upper limit not only for Section 80C but even PPF individually. Hence, should you deposit a higher amount, it will NOT earn any return. Neither will the excess earn an additional tax break.
The PPF deposit need not be invested in one go. It can be done in a maximum of 12 instalments in a financial year.
