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 1st April to 31st 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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