Dilzer Consultants - Investments and Financial Planning

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PPF

Key Features of PPF are as follows:

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

The Scheme is for 15 years.

The rate of interest is 8.80% compounded annually.

The minimum deposit is 500/- and maximum is Rs. 100,000/- in a financial year.

One deposit with a minimum amount of Rs.500/- is mandatory in each financial year, subject to a total deposit of Rs 100000.

The deposit can be in lumpsum or in convenient installments, not more than 12 Installments in a year or two installments in a month subject to total deposit of Rs.100,000/-.

It is not necessary to make a deposit in every month of the year. The amount of deposit can be varied to suit the convenience of the account holders.

The account in which deposits are not made for any reasons is treated as discontinued account and such account can not be closed before maturity.

The discontinued account can be activated by payment of minimum deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year.

Account can be opened by an individual or a minor through the guardian.

Joint account is not permissible.

Those who are contributing to GPF Fund or EPF account can also open a PPF account.

A Power of attorney holder can neither open or operate a PPF account.

The grand father/mother cannot open a PPF behalf of their minor
grand son/daughter.

The deposits shall be in multiple of Rs.5/- subject to minimum amount of Rs.500/-.

The deposit in a minor account is clubbed with the deposit of the account of the Guardian for the limit of Rs.100,000/-.

No age is prescribed for opening a PPF account.

Interest is not contractual but rate is notified by Ministry of Finance, Govt. of India, at the end of each year.

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.

The PPF scheme is operated through SBI and Post office branches.

Account is transferable from one Post office to another and from Post office to Bank and from Bank to Post office.

Account is transferable from one Bank to another bank as well as within the bank to any branch.

Deposits in PPF qualify for rebate under section 80-C of Income Tax Act upto Rs 1,00,000.

The interest on deposits is totally tax free.

Deposits are exempt from wealth tax.

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

Nomination facility available.

Best for long term investment.

How do I open a PPF account? What should I keep in mind when opening my PPF account?

Head over to your nearest State Bank of India branch, or a branch of any of State Bank’s subsidiaries.
You can also open an account in select nationalized banks, and the post office. Fill in the form, attach a photograph, state your PAN Number, and you’re done. Once your formalities are completed, you will receive a pass book which will record all your PPF transactions.

At any point in your life, you are allowed to have only 1 PPF account in your name. You can also have an account in the name of a minor child of whom you are the parent / guardian. However that will be the child’s account, you will simply be the guardian. You can never have a joint account.

If at any time it is seen that you have more than 1 account in your own name, the second account will be deactivated, and only your principal will be returned to you.

If you have a General provident Fund account, or an Employees Provident Fund account, you can still have a PPF account – there is no restriction.

Can I take a loan against my PPF account? 

Yes. You can take a loan from the fund in case of need, you need not wait till you can withdraw from the account.

The first loan can be taken in the third year of opening the account i.e., if the account is opened during the year 2007-08, the first loan can be taken during the year 2009-2010. The loan amount will be restricted to 25% of the balance including interest for the year 2007-08 in the account as on 31/3/2008.

  1. The loan must be repaid in a maximum of 36 EMIs
  2. You can take a second loan against your PPF account before the end of your sixth financial year, but your second loan can be taken only once your first loan is fully settled.

Can I make withdrawals from my PPF account? What is the schedule? 

Yes, you can make one withdrawal per year starting from your seventh year.
The first withdrawal can be done after the expiry of 5 full financial years from the end of the year in which your initial subscription was made. This means that from the day you open your account, you will need to complete 6 full financial years before you can make any withdrawal. Thereafter, you can make one withdrawal per year.

The amount of withdrawal will be limited to 50% of the balance at credit at the end of the fourth year immediately preceding the year in which the amount is to be withdrawn, or the balance at the end of the preceding year, whichever is lower.

For example: if you opened your PPF account on April 1st, 1993, you can make your first withdrawal after April 1st 1999, and the amount of withdrawal will be limited to 50% of the balance as 31st March, 1995, or the balance on 31st March 1999, whichever is lower.

The withdrawal amount is not repayable.

What are my options once my PPF account matures? 

This is something a lot of investors do not know. They are under the impression that you can either close the account, or extend it for 2 blocks of 5 years each. But actually this is not correct. You have 3 choices.

Either you can withdraw your maturity amount, or you can extend your account by a 5 year block, as many times as you want and make fresh contributions, or you can extend the account without making any further contributions, and continue to earn 8% interest on it every year.

If you decide to withdraw your money, your maturity value is exempt from tax.

If you decide to extend your account and continue making fresh contributions, you can extend it for a block of 5 years at a time, as many times as you want, you can also make withdrawals from the account, up to 60% of the account balance that was there at the beginning of the extended period. Just remember, if you choose to extend your account, submit the necessary documentation for extension before one year passes from the maturity date.

If you choose to extend your account without making any fresh contributions, you can do so. In this case, any amount can be withdrawn without any restriction, however you can only withdraw once per year. The balance will continue to earn interest till it is withdrawn. On withdrawal, the PPF proceeds can be used to fund your life goals, such as your retirement, children’s higher education or marriage and so on.

When dealing with the PPF it is very important for you as an investor to keep yourself updated on the latest PPF rules. The onus is on the investor to know the rules, not the bank official you deal with.

Also, as with any investment, there are risks attached. Interest rates going forward are uncertain, and in combination with the very long tenure of this instrument, it is advisable to diversify your fixed income portfolio.

The best time to invest is between the 1st and the 5th of any month, preferably April each year. Interest is calculated for the calendar month on the lowest balance at credit of your account, between the close of the 5th day and the end of the month, and is credited at the end of every year.
Regarding withdrawals from your PPF account, there are 3 things you need to know:

a) Any time after the expiry of the 5th year from the date that the initial subscription is made, you become eligible to withdraw an amount of not more than 50% of the previous year’s balance or of the 4th year immediately preceding the year of withdrawal, whichever is less. If you have taken any loan on your PPF, this also gets factored in and reduces your balance.

b) You cannot make more than a single withdrawal in the year. You need to apply with Form C for any withdrawals.

You can close your account or continue your account without deposits after maturity…

Any time after your account matures i.e. after the 15 year tenure is over, you can withdraw the entire balance using Form C. Interest will continue to be paid on your account and you will receive the total amount including interest up to the last month preceding the month in which you apply for a withdrawal.

You can even continue your account with deposits after maturity…

Few people know this, but the PPF account is indefinitely extendable. It has a 15 year lock in, but then you can extend it for periods of 5 years at a time, indefinitely. Your account continues to operate normally i.e. you make deposits of up to Rs. 1 lakh, earn interest and renew after 5 years if you wish. Everything remains E-E-E. To extend by a block of 5 years, use Form H.

You can withdraw, even if you choose to extend…

If you choose to extend by subscribing for a 5 year block, you can make partial withdrawals (using Form C again) of up to 60% of the amount standing at your credit at the beginning of this 5 year block period.

At any point in your life, you are allowed to have only 1 PPF account in your name. 

You can also have an account in the name of a minor child of whom you are the parent / guardian. However that will be the child’s account, you will simply be the guardian.

If at any time it is seen that you have more than 1 account in your own name, the second account will be deactivated, and only your principal will be returned to you.

If you choose to take a loan against your PPF account, you can repay it within 36 months from the 1st day of the month following the month in which the loan was sanctioned. So if your loan is sanctioned in June, 2012, the following month is July 2012, and you have until end July 2015 to repay your loan. The interest rate charged is 2% p.a. over the prevailing PPF interest rate.

Conclusion

There’s a lot to know that can help you make the most of your PPF account. And if past rate changes are anything to go by, you can expect 8.80% interest to not last forever. As it stands today, the PPF remains E-E-E, so make the most of it to add to your retirement corpus.

All the above questions can be answered by a trust worthy and competent financial planner.

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