Here’s a beginner’s guide to investing in the Public Provident Fund

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Published: March 15, 2017 3:06:34 PM

Public Provident Fund (PPF), a tax-free investment scheme under the aegis of the Ministry of Finance, is an immensely popular investment tool among risk-averse investors as it fetches substantial, tax-free returns with no risk.

PPF is a long-term debt saving scheme which pays interest income to its investors.

Public Provident Fund (PPF), a tax-free investment scheme under the aegis of the Ministry of Finance, is an immensely popular investment tool among risk-averse investors as it fetches substantial, tax-free returns with no risk. Being easily accessible and safe, the scheme encourages saving for long-term goals such as property purchase or retirement.

What is PPF?
PPF is a long-term debt saving scheme which pays interest income to its investors. You can invest in PPF through a post office or any authorized banks. The interest rate on PPF is fixed by the government every year and currently it is at 8.0% for F.Y. 2016-17. The interest rate is determined looking at various macro-economic factors.

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How to invest in PPF
You can open a PPF account either by visiting a bank or post office or by going online on to the bank’s website. You need to provide KYC documents including your photo ID proof, bank details, address proof and photographs to start with the process. If you are opening an account on a minor’s name, you need to provide the birth certificate as well. PPF accounts can’t be opened jointly. NRIs are not allowed to invest in PPF. If an investor becomes an NRI during the investment tenure which lasts for 15 years, he/she can continue to invest in the PPF account until maturity.

How much can you invest
You can start a PPF account with an amount as low as Rs. 100 but the minimum investment you need to make in a year is Rs. 500 while the ceiling is Rs. 1.5 lakh. Any amount invested beyond the Rs. 1.5 lakh limit does not earn interest nor can it be used to claim tax deductions. The investment can be made as a lump sum payment or in 12 monthly instalments. You can appoint a nominee while investing in PPF or include it later. The investment has a lock-in period of 15 years. So you cannot liquidate the investment before the completion of the tenure. However, you can extend the tenure by another five years if you request for an extension within one year of maturity. Interest on PPF account is compounded annually, but the interest calculation is done on a monthly basis. While any amount deposited before the fifth of every month would be considered for interest calculation on that month, the ones deposited after would be considered for the subsequent month.

Tax benefits of PPF investment
While the interest earned on PPF and the amount on redemption are tax-free, investment in the scheme is eligible for tax deduction under Section 80 (C) of the Income Tax Act. The maximum deduction allowed is up to Rs. 1.5 lakh. PPF comes under the Exempt, Exempt, Exempt (EEE) category, meaning the investment is entirely tax-exempt.
PPF withdrawal and closure rule
The PPF has a maturity period of 15 years. However, withdrawals are allowed under certain circumstances. After completion of five financial years, the investment can be withdrawn or closed under the condition that the money is being used for the treatment of serious illnesses or for funding higher education. You are allowed to withdraw 50% of the fourth-year-end balance. However, you can withdraw 50% of the total balance at the end of the year once in a financial year.

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Loan facility against PPF
PPF investors are allowed to take a loan against the PPF from the third year to the sixth year of the opening of the account. A loan worth 25% of the accumulated fund at the end of the preceding three years can be funded.

The interest rate on a loan against PPF is 2% above the PPF rate. You cannot take another loan unless you have paid off the previous one.

(The author is CEO, BankBazaar.com)

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