Public Provident Fund (PPF) - Demystified

What is Public Provident Fund (PPF)?

The Public Provident Fund Scheme is a statutory scheme of the Central Government of India.

Term and Extension of Account

The Scheme is for 15 years. The subscriber can extend the account beyond 15 years for one or more block(s) of 5 years without any loss of benefits. Subscriber can continue to make deposit during this period. One withdrawal in each financial year is also admissible in such account.

Payment through outstation cheque

Where a deposit is made by means of an outstation cheque or instrument, collection charges at the prescribed rate shall be payable along with the deposit and the date of realization of the amount shall be the date of deposit.

Investment amount, mode and revival of account

Minimum Amount: Rs.500/- in a year (year means financial year i.e. from 1^st April to 31^st March) Maximum Amount: Rs.70,000/- in a year.

If contributions in excess of Rs.70,000/- are made during a year – Excess amount will be treated as “Irregular subscription” and will neither carry any interest nor this excess amount will be eligible for rebate under section 88 of I.T. Act.  This excess amount will be refunded without any interest.

The deposit can be in lump sum or in convenient installments, not more than 12 Installments in a year.

PPF account can be revived by paying a nominal fee along with arrear of minimum subscription for each year of default before maturity.

Eligibility

A PPF account can be opened by

• an individual in his own name
• on behalf of a minor of whom he is the guardian
• by the Karta of Hindu undivided family  (HUF) of which he is a member

Only one PPF account can be opened by an individual on his own behalf. However, an additional account can be opened on behalf of a minor of whom he is the guardian or a Hindu undivided family by the Karta of which he is a member. A person having an EPF (Employee Provident Fund) account can open a PPF account. 

However, Joint account is not permissible. A Power of attorney holder can neither open nor operate a PPF account. The grand father/mother cannot open a PPF behalf of their minor grand son/daughter. No age is prescribed for opening a PPF account. PPF accounts are not transferable from one person to another.  In case of death of the subscriber, the nominee cannot continue the account of the deceased subscriber.

Where can a PPF account be opened?

The account can be opened in the Head Post Office or in the branches of SBI or its subsidiaries or in the Nationalized Banks. The account can be transferred at the request of the subscriber from one Post office to another, including Bank to Post Office and vice-versa.

Nomination

A subscriber may nominate one or more person to receive the amount standing to his credit in the event of his death.

No nomination can, however, be made in respect of an account opened on behalf of a minor.

Nomination may also be made in respect of an account on behalf of a Hindu undivided family (HUF).

Nomination may be cancelled or varied by a fresh nomination.

Claims in case of death

Pre-mature closure of a PPF Account is not permissible except in case of death. Nominee/legal heir of PPF Account holder on death of the account holder can not continue the account, but account had to be closed.

In the event of the death of the subscriber, the amount standing to his credit can be repaid to his nominee or legal heir, as the case may be, even before the expiry of fifteen years. Legal heirs can claim up to Rs. One Lakh without producing succession certificate, after completing certain formalities.

Returns

8% (approximate) tax-free interest compounded annually is paid but that is effectively 12.85% pre-tax interest if you are in the 30% tax bracket and 11.25% if in the 20% tax bracket. The government realigns the interest rate on a quarterly frequency to the prevailing market rates. It is difficult to find fixed-income instruments (at the same low risk level) that can yield you comparable returns. Interest is not contractual but rate is notified by Ministry of Finance, Govt. of India, at the end of each year.

Tax Benefits

(i). Rebate on investment U/S 80C of I.T. Act 1961

(ii). Interest income fully exempted from income tax.

(iii). Balance held in the P.P.F. account is completely free from wealth Tax.

Other Benefit

The balance amount in PPF in PPF account is not subject to attachment under any order or decree of court in respect of any debt or liability.

Risks

An investment in the PPF is equivalent to the risk of lending to the government, and hence has the lowest level of default risk.

Liquidity

The one disadvantage of PPF is lack of liquidity. To overcome that, Partial withdrawals are allowed only from the sixth year onwards. However, loan facility is available from the third year.

Partial Withdrawal

Beginning the seventh year and every year thereafter, you are entitled to withdraw 50% of the balance to your credit at the end of the fourth or the first previous financial year, whichever is lower.  Only one withdrawal is permissible in a year. Thereafter one Withdrawal in every year is permissible.

Loan

The first loan can be taken in the third financial year from the financial year in which the account was opened up to 25% of the amount at credit at the end of the first financial year.

 Subsequent loan can be taken when the earlier loan with interest has been fully repaid. The loan is repayment either in lump-sum or in convenient installments numbering not more then 36.  If you repay the loan in 36 months, interest will be charged at 12% p.a. Otherwise, interest will be charged on the outstanding sum at 6% per month. A second loan can be obtained before the end of the 6th financial year if the first one is fully repaid. 

Other important information

A female subscriber can change her name in the PPF account in the event of her marriage

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A note on EPF vs PPF for further reading

In India, the Employees' Provident Fund and the Public Provident Fund are some small saving schemes for salaried employees. In both these schemes, the employees save a fraction of their salaries that they can utilize for their retirement or otherwise, when they are unable to work. While both are small saving tools for employees, they function differently. The Employees' Provident Fund  or EPF is governed under the retirement fund body Employees' Provident Fund Organisation and is mandatory for all employees. Meanwhile, the Public Provident Fund or PPF was introduced by the National Savings Organisations in 1968. Here, the employee has the choice to open a PPF account or not.

Employees' Provident Fund (EPF):

Under the retirement fund body Employees' Provident Fund Organisation, EPF is like the social security scheme for individuals working in private companies. EPF is available in companies or firms that have more than 20 employees under the rules by law. An employee needs to invest 12% of salary under this scheme. An alternative choice of investing more than the basic 12% can be invested under the Volunteer provident fund. The employee also avails life insurance cover and can nominate a family member who can benefit from the corpus post the demise of the account holder.

Currently, the rate of interest on the EPF account is 8.65%.

A partial amount in the EPF account can be withdrawn on the account of marriage, education, purchase of property, home loan repayment, renovation or pre-retirement. The limit to the amount that can be extracted is subject to the reason of withdrawal and the tenure of the service of the employee.

The EPF account can be closed when the employee quits the existing job and there is also an option of transferring the EPF account from one firm to another. This means that EPF account does not have fixed maturity period. It is simply a savings scheme for employees to have some funds saved for the future. If the employee withdraws after the retirement age of 60 years, the individual gains both the EPF as well as Employee Pension Scheme (EPS) funds. 

Public Provident Fund (PPF):

The saving scheme readily available for government employees, introduced by the National Savings Organisations in 1968. The PPF account benefits from attractive interest rates and returns exempted from tax. Individuals can invest minimum to Rs 500 or a maximum of Rs  1,50,000 per annum. If excess, the amount will not earn any interest on it. Moreover, the amount will not eligible for rebate under Income Tax Act. 

Currently, the rate of interest on the PPF account is 8%.

Since it is a long term investment, the PPF account cannot be closed until the maturity period of 15 years. In other words, the account holder avails the returns as well as the entire amount standing only after the maturity period of 15 years. However, if an individual has a dire need for funds  can make pre-mature withdrawal from year 7 (or completing 6 years). For this, one just needs to make a declaration and fill Form C to avail the existing funds in their PPF account.

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1. Is the benefit of Tax Deduction under section 88 of the Income Tax Act available to a spouse when he or she contributes to the Public Provident Fund account maintained by the other?
Yes it is permissible! The benefit under Section 88 is admissible to both, a husband contributing to the wife's account and vice versa. However, there is a condition that the contributions should be made out of the contributor's taxable income.

2. For how many years can a PPF account be extended after the initial 15 years of operating a PPF account?

After the PPF account has been in operation for 15 years, it can be extended for the duration of five years at a time. There is no limit to this; extensions can be taken any number of times.

3. Can the PPF account be attached?

Yes, the PPF account can be attached by the Income Tax and Estate Duty authorities. The PPF act only gives the account holder immunity against attachment under a decree / order of a court of law.

4. In the event of the death of a guardian, in relation to a minor, should the PPF account in the name of the minor be closed and a new account opened?

In such a case, the minor is treated as subscriber. The amount left in his/her account does not become payable on the death of the guardian. Under Section 8 of the PPF Act it becomes payable only on death of the subscriber. In case of death of guardian the account of minor remains operative and a new account need not be opened. The surviving natural guardian or a guardian appointed by a competent court may continue the account of minor after producing the necessary guardianship certificate.

5. In the event of the death of the minor subscriber is the balance in the account payable to the guardian?

No, the guardian is not entitled to the payment of the balance. The balance in such cases is payable to the legal heirs of the minor, in accordance with Section 8 of Public Provident Fund Act and para 12(6)(ii) of the Public Provident Fund Scheme.

6. Is there any fee for cancellation or variation of nomination the way it is charged in a savings account?

No, don't worry there isn't. Rule 12 of the Scheme has no provision for any such fees; therefore there is no fee for cancellation or variation of nominations.

7. Can one get a loan or withdraw money from those accounts to which regular subscriptions haven't been made every year?

No, because a subscriber who has not maintained his subscriptions in the account as per Rule 3 of the Scheme and has defaulted on his subscriptions in any year, will not be eligible either for a loan or for a partial withdrawal from the account. This will be allowed only if the person pays the subscription arrears along with the default fee.

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FMPs: Explaining Gains and Risk Involved

FMPs (Fixed Maturity Plans)

FMPs Description:

FMPs are good options for investors wanting to block their money for a fixed time frame. Though the returns are not assured, investors can expect a return in tune with the current interest rate scenario.

These close-ended schemes (meaning that one can only enter them when they are launched and exit them when their pre-stated term is over) seek to generate regular returns and capital appreciation by investing in debt, government and money market securities normally maturing in line with the duration of the scheme.

More than 60% of the FMP applications are for a period of 13 months. The logic behind going for 13-month FMP is that such plans also get the benefit of double indexation (explained later).

Risk Involved:

However, before rushing in to invest in FMPs, one should remember that they are little bit riskier compared to Fixed Deposits (FDs) as they also invest in bonds and debentures of companies. And, if the company invested in defaults, the FMP would be in a tight spot to deliver the indicative returns. Where as FDs invest in risk-free assets like government bonds.

Benefits:

An investor selling fixed income securities (like FDs) older than one year is liable to pay long-term capital gains tax on it. But, the actual gain is much less than what is likely to appear on selling the securities because of inflation during the said period.

But we all know that long term FMPs give indexation benefit to the investors. Meaning of Indexation is that the actual gain to the investor is the gain after deducting his cost plus inflation during that period. This process of setting off the inflation rate is called indexation which FMPs enjoy compared to bank FDs.

Gains of Double Indexation

If you are planning a debt fund investment early in the next financial year, it will be worthwhile to advance it a bit and do so before the end of the year. Here is how it will be more tax efficient.

Debt funds are taxed at the lower rate of 10 % of the capital gains without indexation or 20 % with indexation. Indexation is essentially an inflation adjustment made on long - term (i.e. more than one year) capital gains earned by you. If you invest before the end of financial year, you will be able to avail the indexation benefit of one additional year.

The table illustrates how an investor can avail the indexation benefit for two years instead of one (popularly called the 'double indexation' benefit) by investing just before March 31. This leads to an increase in the deemed cost of investment (the indexed cost of acquisition) for taxation purposes, and hence a reduction in tax liability. While the illustration assumes an investment made in 2005, it will work in a similar way for any financial year.

Although this is applicable for all debt funds, it is particularly popular with FMP investors. They typically invest in FMPs of a little over one year duration just before the end of the financial year and pay lesser tax on the gains. 

Investment
				Before March 31, 05		After March 31, 05
i		Amount Invested		100,000		100,000
ii		Gains (assuming 9% return)		9,000		9,000
iii		Redemption Value (i+ii)		109,000		109,000
iv		Indexed cost of acquisition*		108,125		104,427
v		Taxable Gains (iii-iv)		875		4,573
vi		Capital Gains Tax		175		915

Illustration:

Let us look at the following illustration which compares the FMPs (both with indexation and without indexation) viz-a-viz ordinary Bank FDs (Fixed Deposits).

	Bank FD	FMP Fund
		With Indexation	Without Indexation
Amount Invested (Rs.)	10,000	10,000	10,000
Tenure (Months)	19	19	19
Illustrative Return*	11.00%	11.00%	11.00%
Maturity Value	11,797	11,797	11,797
Income/Capital Gains on Value	1,797	1,797	1,797
Indexation Factor^	NA	1.115	NA
Indexed Cost	NA	11,150	NA
Capital Gain (adjusted for indexation)	NA	647	NA
Tax Rate Applicable#	33.99%	22.66%	11.33%
Tax Liability	611	147	204
Net Gain (Rs.)	1,186	1,650	1,593
Post Tax Returns	7.34%	10.13%	9.79%

Where will you get FMPs?

FMPs are available with all major mutual fund houses, like HDFC Mutual Fund, Reliance Mutual Fund, UTI Mutual Fund, Franklin Templeton Mutual Funds, SBI Mutual Funds, etc. The name of the fund is of the sort, fixed maturity plan – series XYZ (since they are close ended funds) or fixed horizon maturity funds – series XYZ.

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Liquid Mutual Funds: Notes

What are Liquid Mutual Funds?

Liquid funds are the safest category of mutual funds. They are also known as cash funds. These funds invest in fixed return instruments of short maturities. Examples of such investments include Treasury Bills, Commercial Paper, and Certificates of Deposit.

Treasury Bills (T-bills): These are short-term government securities with maturities of no more than one year. They are considered risk-free because they are issued by the government.

Commercial Paper (CP): This is a debt instrument issued by companies to meet short-term financing needs.

Certificates of Deposit (CD): This is an interest-bearing, short-term debt instrument issued by a bank.

Aim of Liquid Mutual Fund

Their main aim is to preserve the principal and earn a modest return, so the money you invest will eventually be returned to you with a little something added. Considering that money market instruments are some of the most secure instruments, these funds are good investments for conservative investors for their short-term investment needs. 

Analysis of the instrument

The credit quality of the investments is high therefore the risk of default is low. The maturity is low so the loss due to the adverse movements in the interest rates is negligible. Though the returns are not fixed (as in case of a bank deposit), the risk of losing money is minimal.

Please Note: A long-term fixed-return instrument gets affected as interest rates change in the economy.

Return Illustration

Expecting a 6-7% per annum (average) is quite reasonable. 

Some Prominent Liquid Funds

• LIC MF Liquid
• Templeton India Low Duration
• Birla Sunlife Cash Plus
• DSP ML Liquidity
• UTI Liquid – STP
• Reliance Liquid Fund – Cash Plan

You must know:

There is no entry load or exit load for majority of the Liquid Funds. However, some funds charge an exit load of 1%, if the fund is redeemed before 1 week.

Also, these funds have very low expense ratio (the charges for handling the fund). Minimum amount you have to deposit for the first time is usually 25 thousand to open your account. (Differs with fund houses)However, you can remove any amount from you account after that.

Advantages of Liquid Funds over savings deposit (S/B Accounts)

1. The biggest advantage of Liquid Funds over savings account deposits is the interest rates. Savings accounts in India provide an interest rate of 4% P.A (per annum) over the average balance maintained in the account. (Some private banks even give this 4% over the lowest balance maintained in the account). However, Liquid Funds on the other hand provide on an average 6-7% P.A. (modest).
2. The second advantage is with respect to availing the interest accrued on the principal. In case of Savings Bank Account, if you want to avail the interest on the principal you have to wait till the end of that quarter. However, in case of Liquid Funds whenever you redeem your fund you will get the principal plus the interest accrued.
3. There is no minimum balance maintenance requirement. Once the account is opened with the minimum amount (25 thousand), you can keep any amount in your folio.

Concerns:

The first concern against Liquid Funds is the instant liquidity: Consider 2 cases, on one hand, you decide to take out some money from your Savings Account (Traditional Way). You go to the bank and deposit the withdrawal slip and you have cash in hand. There are even faster ways such as ATM and e-transfer to facilitate this.

However, in case of liquid funds, you go to the mutual funds office and submit the redemption form and the money is transferred to your linked savings bank account within 24-30 hours.
The second concern against Liquid Funds is the Dividend Distribution Tax (DDT) applicable (deducted at AMC end, including surcharge and cess) of around 27.04%.

Last words:

Hence if you want to make an efficient use of your capital, don’t let inflation eat into it by simply keeping it in a savings bank. Keep only that much amount, which you will require in hours notice in a bank with ATM facility and deposit the remaining in a good Liquid Fund.

(Disclaimer: This document is created by Booombaastic. Reproduction of any part of this document by any medium is strictly prohibited and suitable actions will be taken against the errant)