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FINANCE 5 things to know about the PPF
The Public Provident Fund (PPF) may be one of the most popular tax-saving
schemes, which can be opened in a post office or designated bank branches,
but do you know the investment limit or the withdrawal time frame? Here’s
how to familiarise yourself with this investment option. 1
How much is the interest rate?
The interest rate offered on the PPF is no longer fixed, but linked to
the market. It is 0.25% above the 10-year government bond yield. This does
not mean that the rate will change on a day-today basis. It will be
announced every year in April, based on the average bond yield in the
previous year. For the current financial year, it is 8.8%, but could recede
next year. Bond yields have fallen below 8% in recent weeks and the average
for 2012-13 has dropped to 8.25%. Analysts don’t expect the PPF rate to be
more than 8.5% in 2013-14. 2
How does the interest accrue?
The interest on your PPF balance is compounded annually, but the
calculation is done every month. The interest is calculated on the lowest
balance between the fifth and last day of every month. So, if you invest
before the 5th, the contribution will earn interest for that month too.
Otherwise, it’s like an interest-free loan to the government for a month.
If you are investing through a cheque, make sure you deposit it 3-4 days
before the cut-off date. If your bank is lethargic in crediting the amount
to your PPF account, your investment might miss the deadline. 3
What are the tax benefits?
The PPF corpus is tax-free at all three stages. The investment is
eligible for tax deduction under Section 80C. The interest earned is also
tax-free, and so are withdrawals. The original draft Direct Taxes Code,
introduced in 2010, had proposed withdrawal of tax benefit. Though it would
have been with prospective effect and existing investments would have been
exempt, there was strong opposition to the move. The revised draft DTC
nixed the proposal. However, with P Chidambaram back as finance minister,
the original DTC proposals may come back in some form. Make the most of
this tax-free opportunity before the rules change. 4
How much can you invest?
The investment limit is 1 lakh in a year through a maximum of 12
instalments. If your minor child has a PPF account, the combined limit for
both accounts will be 1 lakh. Don’t invest more than the 1 lakh in a year,
because if it is discovered, any interest earned by the excess amount will
be reversed. There is also a minimum investment required. An investor has
to put in at least 500 in his PPF account in a year. You will be levied a
small, but irksome, penalty of 50 if you fail to do so. 5
When does it mature?
A PPF account matures in 15 years, but you can extend the tenure in
blocks of five years after maturity. The balance continues to earn interest
at the normal rate. The minimum investment of 500 has to be maintained even
for accounts extended beyond 15 years. This does not mean your money is
locked up for this period. The lock-in period falls with every passing
year. In the 14th year, it will only be one year. If you need money, you
can withdraw after the sixth year, but it cannot exceed 50% of the balance
at the end of fourth year, or the immediate preceding year, whichever is
lower. You can also withdraw only once in a financial year. You can also
take a loan against it, but this cannot exceed 25% of the balance in the
preceding year. The loan is charged at 2% till 36 months, and 6% for longer
tenures. Till a loan is repaid, you can’t take more loans.
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