Since decades, PPF (Public Provident Fund) has remained one of the popular investment alternatives, especially for risk-averse investors who are satisfied with moderate but guaranteed returns. Amidst the rising popularity of other investment platforms like mutual funds, PPF is most trusted because of sovereign guarantee from the government on the principal invested and interest earned. However, despite its acclamation, many investors are not aware of the most important facts associated with the PPF account. Here are some of them:
Currently, PPF offers 7.9% returns that is compounded annually. Basis the yields of government bonds, the Ministry of Finance reviews interest rate every financial quarter. Returns on PPF enjoys Exempt-Exempt-Exempt (EEE) tax status which means that the interest earned, proceeds gathered on maturity and investments are tax exempt under Section 80C of the I-T Act. This tax-free status gives PPF an advantage over 5 year-tax saving fixed deposit from banks and post office as their interest income is taxable as per the tax slab of the depositor.
Extension in a block of 5 years on maturity
On maturity at the end of 15 years, you get the choice to either close the account and withdraw the amount or extend maturity period in a block of 5 years – with or without new deposits. If you continue your PPF account without any fresh deposits, then you do not need to inform the branch for such extensions as it will automatically be considered as extended. But you must note, no fresh deposits will be allowed thereafter. For the next 5 years, the PPF balance would keep earning the applicable interest.
To extend your PPF account with fresh deposits, you need to intimate the branch before the expiry of 1 year from the maturity date in writing by filling up Form H.
PPF offers liquidity through partial withdrawals. You can make 1 withdrawal every year from the 7th year of opening the account. The amount available for withdrawal must not exceed 50% of the available balance at the end of the 4th year immediately preceding the year or the amount at the end of preceding year, whichever is lower. Withdrawals made before the maturity period is tax exempt as PPF comes under the EEE category. However, it is important for you to declare such withdrawals when filing for income tax returns.
To be eligible for premature closure, you must have completed at least 5 financial years. However, you would be allowed premature closure only in case of the death of the holder, treatment of ailment or life-threatening diseases of the holder, spouse, parent, or children, or if the amount is required for higher education of the holder or minor account holder. You will be required to submit supporting documents from competent medical authority (in case of death or medical emergency) or fee bills for confirmation of admission from recognised institute of higher education in India or abroad.
Remember that premature closure is subject to penalty. You would receive 1% less interest rate than applicable interest rate, from the date of opening the account till the date of such premature closure.
Loan against PPF
You can avail a loan against PPF from the 3rd financial year up to the 6th financial year to the extent of 25% of the amount deposited at the end of the second year immediately preceding the year in which the loan is applied. Loan is repayable either in one lumpsum or in two or more monthly instalments within a period of 3 years from the day the loan is sanctioned. After the repayment of the principal amount of the loan, you shall pay the interest in not more than 2 monthly instalments at a rate of 2% p.a. over and above the applicable PPF interest rate of the principal. The interest on the outstanding loan amount shall be charged at 6% p.a. over and above the applicable PPF interest rate, in case you are unable to repay the loan amount in full or in parts within 3 years.
PPF account transfer
You can transfer your PPF account for various reasons like job transfer to another city or to get better services if you are not satisfied with your present account provider. To initiate the transfer, you need to visit your existing post office or bank and submit a transfer request. On receiving the request, the provider will provide the closure documents which is essential to transfer and open the PPF account with the new PPF account provider. To initiate a bank to bank PPF transfer opening a savings account with the new bank is a must. If you are an existing customer of the bank, then you can open the PPF account by submitting a fresh PPF account opening form, nomination form and the original PPF passbook of your previous PPF account provider.
PPF suits risk-averse investors who prefer capital protection over growth. With benefits like tax-free returns and sovereign guarantee from the government, PPF serves to be the safest fund among all investment options. However, investors with moderate to high risk appetite, having an investment horizon of more than five years, must prefer equity mutual funds over PPF. This is because, equity mutual funds have the potential to outperform fixed income instruments, including PPF, and inflation by a wide margin over the long term. Those looking to save tax under Section 80C can consider investing in ELSS.
(The author is CEO & Co-founder, Paisabazaar.com)