7 questions on PPF answered

The Public Provident Fund, or PPF, is a government backed small-saving scheme, and a very popular tax-saving instrument.

You can open an account with the post office, nationalised banks, and select public sector banks and private banks such as Axis Bank, ICICI Bank and HDFC Bank.

Is it a fixed-return investment? 

Yes. You are assured of a fixed return, though the exact figure fluctuates. The rates are fixed every quarter; as of now, it is 7.1%. At one time it returned an enticing 12% p.a. to gradually taper down to 7.9% p.a. before moving to 8.8% p.a. It is not an ad-hoc quarterly adjustment but benchmarked against the 10-year government bond yield. This periodic exercise is to keep it aligned with the current interest rate scenario. 

• Interest rate is compounded annually
• Interest is calculated on a monthly basis
• Interest is paid on the lowest amount between the fifth of the month and the last day of the month
• Interest is credited to the account at the end of the financial year, March 31
• Interest rate is reset every quarter

Is it safe? 

• It is a sovereign-backed investment, which means it is issued by the national government of a country. Since the funds in PPF are backed by the central government, the investment does not get any safer than this because the government will not default in its payment. It stands for the highest safety.
• Moreover, the amount in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder.

What is the tax benefit? 

• The principal amount invested is eligible for a deduction under Section 80C of the Income Tax Act
• The interest earned is not taxable
• On maturity, the accumulated amount is not taxable 

Can I have a joint account with my children? 

An individual can only have one PPF account. It is not possible to have a joint account holder but the nomination facility is available.

In the case of death of the account holder, the account shall be closed. No nominee or legal heir can continue to deposit in the account. The PPF rate of interest shall be paid till the end of the preceding month in which the account is closed.

You can open an account in the name of a minor child of whom you are the parent/guardian. However, that account will be only in the child’s name and you will be named as the guardian.

Let’s say you have a son, Ravi. Either you be the guardian for Ravi’s account or your spouse. But Ravi, can only have one account in his name.

Do I have to invest every year?

Yes. But, there are limits in a single financial year (April 1 – March 31).

The minimum that you can invest in any FY is Rs 500. The maximum that you can invest is Rs 1,50,000. You can invest this at one time, or in instalments.

If you are putting money into your account and into your child’s account (for which you are guardian), the total limit for both is Rs 1,50,000. Hence, in that context, the limit of Rs 1.50 lakh is per individual tax payer, not per account.

The tenure of the account is for 15 years. If you do not deposit the minimum amount of Rs 500 in a year, the account will be discontinued. To revive a discontinued account, you will have to deposit the minimum annual subscription (Rs 500) + the penalty (Rs 50 for each defaulted year).

Can I close the account when I choose to?

It is a 15-year investment with a 16-year lock-in. The first year is not taken into consideration when looking at the maturity of the account. The end of the financial year in which the deposit was made is what matters. So, if you opened the account on July 15, 2000, the 15-year tenure will commence from the end of FY2000-01 (March 31, 2001). That means it would have matured on March 31, 2016.

Premature closure is allowed after 5 years from the end of the year in which the account was opened subject to either of the following circumstances:

• Life-threatening disease of account holder/spouse/dependent children
• Higher education expenses of the account holder/dependent children
• The account holder has shifted abroad and there is a change of resident status

As a penalty, at the time of premature closure, 1% interest shall be deducted from the date of account opening.

On the other hand, if you hold the account till maturity and want to continue doing so, you can. The account can be extended in blocks of 5 years.

Can I access the money when the account is active? 

Loans can be availed between the 3rd and the 6th financial year. The rate of interest on the loan is just 1%. However, the amount taken as a loan will cease to earn a return till it is repaid, along with interest. So you lose out on the tax-exempted interest (7.1%) and pay interest (1%). So only if the need is urgent and you are in a position to replace it quickly, opt for it. Or else, it defeats the purpose of compounding.

A partial withdrawal facility can be availed from the 7th financial year onwards.

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