Well, I am pretty sure that while growing up, you would have heard of the term ‘PPF’ or its expanded version “Public Provident Fund” more than once and wondered about its significance. Let me tell you at the outset that this is a hugely important financial instrument and the best way I could make you aware about its importance is this: PPFs are like the alphabets A-Z of English and hence, without knowing it, we cannot progress in the World of personal finance.
Also, let me mention that if you are not quite interested in financial planning/knowledge, it is most apt that you just learn everything about this instrument as it is a must have for saving, tax benefits, safety and earning money.
Since most people would know something about PPFs (I am hoping), I have structured this article in form of Q&A which will allow you to completely skip reading about stuff you already know. So, let’s roll
1. What is PPF and why so much noise about it?
A. PPF or “Public Provident Fund” is a long term debt scheme of Government of India (GOI) on which regular interest is paid.
2. Can I open a PPF account?
A. If you are a resident of India then you can open a PPF account and the best thing is that you can be salaried, self-employed or any other category.
3. Who offers the facility of opening a PPF account?
A. The post office and some authorized nationalized banks like SBI, IDBI, BOB etc. offer the facility of opening PPF accounts. The best bid is to find out whether your bank is an authorized party and act accordingly.
4. All this is cool, but how much do I need to pay for this PPF thing?
A. Since things are now seeming cool, let me tell you the kind of money you need to invest in order to keep your PPF running.
Rs 100: To start your PPF account.
Rs 500: Minimum deposit amount every year.
Rs 1, 00,000: Maximum deposit amount allowed in a year
Also, if you fail to invest the minimum amount in a year, a penalty is levied along with arrear of deposit i.e Rs 500. This can be easily found out before putting in money.
5. Okay, but do I earn any interest on my invested money?
A. Definitely, Yes. The interest rate on PPF is announced by RBI for a financial year in March. The interest rate for 2013-14 is 8.7% compounded annually. The said interest is calculated on the minimum balance between 5th and last day of the month.
Tip: To maximize your earning, deposit money between 1stand 5th of the month.
6. The interest amount is tempting but I want to know the period for which a PPF scheme runs because my money will be blocked for all that time?
A. The period for which any investment scheme runs is a big concern for people as their money stays blocked for all that time. As for a PPF scheme, the tenure is 15 years. There is no need to panic because there are options like pre-mature withdrawal and taking loans against your PPF account in case you have a need for urgent money.
Alternatively, you can also extend your PPF account after a period of 15 years with or without subscription in a block of five years. The details of extension can be queried if you want to avail the facility.
7. So what about pre-mature withdrawal?
A. As I mentioned, investors have an option to withdraw money from their PPF account but this option can be exercised only after the expiry of 5th year from the date of first investment to your PPF account. Additionally, the amount that can be withdrawn is lower of:
a. 50% of balance at the end of fourth year.
b. 50% of balance at the end of immediately preceding year.
And, it might be a bit off-putting but only one withdrawal is allowed in one financial year.
8. And, what were you saying about loans against PPF account?
A. Yes, you heard it correctly. However, there are some terms and conditions (Always there, aren’t they) that need to be fulfilled for availing the said loans.
· Loans can be taken from third year onwards till sixth year
· Maximum amount that can be taken as loan is 25% of the balance at the end of 2nd immediately preceding year.
· These withdrawals have to be repaid within 24 months.
· The interest rate charged on loan is 2% more than interest rate on PPF account.
· A second loan can be taken if you are within the 3rd year – 6th year bracket and first loan is fully paid.
I agree that such T&C can freak out anyone but you need to take a loan only if you are in dire need of money in the first 5 years. Once 5th year expires, you can withdraw money.
9. Wait, I have an important question. Why should I not invest in a tax-saving FD because the tax benefits are similar in both cases?
A. Well, first off, it is not correct that the tax benefits are similar for tax-saving FD and PPF. While, the principal component i.e the investment made is non-taxable in both cases, the interest received on principal is taxable in case of a tax-saving FD and not in PPF.
However, the maturity period of a tax-saving FD is 5 years while for a PPF, it is 15 years. It is better to do a comparative study before picking one out of them based on your financial goals, after-tax interest etc.
This particular article gives very good insight with regards to a comparative study of these two options.
10. The benefits of a PPF account cannot be ignored. I guess, I will open more than one account?
A. Sorry, but you can only open one PPF account in your name. Also, GOI has disallowed HUFs from opening a PPF account.
Well, these ten questions would answer most of your queries relating to PPF investment and interest income. However, if there are any doubts related to any aspect of PPFs, you can post them in the comments section below.
Watch out my next article on: Direct Investing Vs Mutual Funds
Use this calculator if you want to calculate PPF interest income based on your estimated investment.