PPF, for superior post-tax returns

The PPF investment, the interest earned and the maturity amount, are all exempt from tax

If the volatility in equity markets is worrying you, and you are seeking fixed-return investments, public provident fund (PPF) is an option you can consider.

The Centre introduced PPF in 1968 as an investment scheme. It is implemented through India Post, public sector banks and select private banks such as Axis Bank and ICICI Bank. One can walk into a designated post office or a bank branch to open a PPF account. You can also open a PPF account online from the comfort of your home. Only resident Indians are eligible to invest in the PPF scheme. NRIs can retain the investment made in the scheme before leaving the country, until maturity, but no fresh investment can be made.

How to get started?

One has to fulfil the KYC (know-your-customer) requirement by submitting documents such as identity proof, address proof and Aadhar, in addition to submitting the requisite application duly filled, in order to open a PPF account.

The minimum investment to open a PPF account is ₹100 and the maximum in any given year is ₹1.5 lakh. However, one needs to invest a minimum of ₹500 every year to keep the account active. In case you fail to make the minimum investment, the subscriber will have to pay a penalty of ₹50/year to re-activate the account. At the time of re-activation, you will have to pay the minimum investment of ₹500/year for the inactive period.

One can invest in one shot or in instalments, subject to a maximum of 12 instalments in any given year. If the investment is made before the 5th of the given month, the individual is entitled to receive interest for the full month. The interest is calculated on the lowest balance in the account from the close of the fifth day to the end of the month.

Investment in PPF is eligible for tax exemption under Section 80C of the Income Tax Act, 1961. The interest earned on the PPF investment is also exempt from tax. And so is the maturity amount. That puts PPF in the exempt-exempt-exempt (EEE) category, making it among the most tax-efficient investment options.

In case you are moving cities and find it inconvenient to operate the account through the local post office, it is easy to transfer your PPF account to another post office.

There is no minimum or maximum age for opening a PPF account.

The interest rate on the PPF investment is notified by the government every quarter. The interest rate applicable for the July-September 2018 quarter is 7.6 per cent. The accumulated corpus earns interest at the rate announced every quarter. The interest is compounded annually and credited at the end of the year.

A long wait

While PPF scores very high on a post-tax return (no tax) basis compared with other fixed-return instruments, the major shortcoming is that the tenure of the investment is long — 15 years. One can completely withdraw the maturity value only at the end of the 15th year under normal circumstances. However, under the PPF Amendment Scheme, 2016, premature withdrawal shall be allowed on two grounds upon production of supporting documents from competent authorities. First, if the subscriber needs liquidity for treating life-threatening disease for self, spouse or dependant children. Second, for higher education of the account holder a minor account holder. In case you don’t need the money even at the end of the 15th year, you can extend it further in blocks of five years. However, you need to decide on the extension of the investment within 12 months from the date of maturity.

In case the subscriber needs liquidity for other reasons, he can do partial withdrawal from the seventh year onwards. The subscriber can withdraw up to 50 per cent of the balance at the end of four years preceding the year of withdrawal, or 50 per cent of the balance at the end of the previous year, whichever is low. For instance, in the seventh financial year, you can withdraw lower of 50 per cent of the balance at the end of the third year and 50 per cent of the balance at the end of the sixth year.

In case you need money to meet some emergency even before the seventh year, you can avail yourself of the loan facility, which is available from the third financial year. The loan amount is capped at 25 per cent of the balance at the end of the second year preceding the year in which one is applying for the loan. For instance, the maximum loan in the third financial year is 25 per cent of the first year’s closing balance (principal, plus interest). You will have to pay 2 per cent more than what you earn on your PPF account as interest on your loan, provided you repay it within 36 months, failing which you will be charged 6 per cent over the interest earned on your PPF balance.

The writer is co-founder, RaNa Investment Advisors.

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