Public Provident Fund or PPF is a great tool to invest not only for tax saving but also the best debt investment product. In today’s post, let us understand this product fully.
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Public Provident Fund (PPF) is the scheme floated under the PPF Act 1968 by the central government. PPF is the wonderful product for all who looks for safe, government-backed and tax beneficial investment. Below are the features of PPF.
# Tenure of Public Provident Fund or PPF
Tenure is 15 years. But in reality it is more than 15 years. For example, suppose you opened the account on 5th March 2013 and 15 years will complete on 5th March 2028. But this is not the maturity date of this account. Instead it will be 1st April 2028 (which will be first working day of immediate FY). I tried to explain the same with below image.
# Interest Rate of Public Provident Fund or PPF
Current interest rate of PPF for Financial Year 2015-16 will be 8.70% compounding annually. This interest now will change on quarterly base. I will update as and when there is a change in interest rate.
# Minimum and Maximum Investment in Public Provident Fund or PPF
Minimum investment is Rs.500 and Maximum investment is Rs.1,50,000 (Maximum limit raised to Rs.1,50,000 from Budget 2014). Amount invested more than Rs.1,50,000 will not be eligible for interest and for tax benefit under Sec 80C.
But keep in mind that this limit is combined limit of your own account and the account where you are a guardian. Hence, if you have your own PPF account and you opened an account on behalf of your minor kid, then the combined limit for your is Rs.1,50,000 only but not Rs.3,00,000.
# Tax Benefit of Public Provident Fund or PPF
The amount invested in PPF will be eligible for deduction under Sec 80C and maturity interest is tax exempt. So it is EEE (Exempt during investment under Sec.80C-Interest earned during PPF tenure is also exempt-Maturity amount is also tax-free).
# Who can open Public Provident Fund or PPF?
You are eligible to open only one PPF account in your name. But if found to be you have more than one account then your second account will be deactivated. You will receive only principal of what you paid. You can’t open PPF in joint holding. But you can open PPF account in your spouse or minor child name.
Only parents are allowed to open the account on behalf of a minor child. If both parents not alive or living parent incapable of acting, then a person entitled under the law is eligible to open an account on behalf of a minor.
Keep in mind that let us say Mr.X and Mrs.Y are married couples. They have a kid named Mr.Z. In this case, either Mr.X is allowed to open account or Mrs.Y on behalf of minor kid Mr.Z. Both can’t open two separate accounts on behalf same minor kid Mr.Z.
# Maximum number of contributions in a year
You can’t invest more than 12 installments in a year. Means if you planned for contribution of Rs.1,000 then maximum contribution you can make is 12. Not more than that.
# Public Provident Fund or PPF is free from any attachement
This account can’t be attached for your debt or liability. So this is totally safest form of investment.
# Where to open Public Provident Fund or PPF?
You can open PPF account by visiting your nearest Post Office or select nationalized banks, now with ICICI bank too.
# How to get more benefit in Public Provident Fund or PPF?
Read my post “PPF-When to contribute to get higher returns?” to know more about the way of calculation of interest and which way of contribution is best.
# When we can get Loan or allowed to withdraw in Public Provident Fund or PPF?
Read my post “PPF-Loan and Withdrawal” to know more about the eligibility of loan and withdrawal.
# What is the penalty if you forget to deposit the amount?
If you forget to contribute the minimum amount in any year then the account will be deactivated. To activate you need to pay Rs.50 as penalty for each inactive year also you need to pay Rs.500 for each inactive year’s contribution.
# Whether NRIs can open Public Provident Fund or PPF?
The notification says “Provided that if a resident who opened an account under this scheme, subsequently becomes a non Resident during the currency of the maturity period, the account shall be deemed to be closed with effect from the day he becomes a non-resident and interest with effect from that date shall be paid at the rate applicable to the Post Office Saving Account up to the last day of the month preceding the month in which the account is actually closed“.
Hence, as per this new amendment, NRIs are not allowed to continue the PPF up to maturity. Their account will be closed immediately once their status changes to NRI from resident Indian.
Now the interesting point in regards to interest payout once you turn to be NRI is “interest with effect from that date shall be paid at the rate applicable to the Post Office Saving Account up to the last day of the month preceding the month in which the account is actually closed”.
This means let us assume your residential status changed from Resident Indian to NRI on 25th October 2017 and Post Office Savings Account interest rate for September 2017 was at 4%, then your PPF will earn 4% interest from 25th October 2017.
# What if the account holder dies?
In case death of account holder then the balance amount will be paid to his nominee or legal heir even before 15 years too. So nominees or legal heirs are not eligible to continue the deceased account. If balance amount is more than Rs.1,50,000 then deceased nominee or legal heir has to prove the identity to claim the amount.
# Whether account holder name in PPF be changed?
PPF can be transferred from one place to another place or among the PPF service providing institution. But can’t be transferred from one name to another.
# Once your account completes 15 years then what options do you?
a) You can withdraw your whole amount.
b) You can extend for a 5 years block as many times as you wish.
c) You can continue earning interest without contributing or extending the term.
Refer my post on the same “PPF withdrawal rules & options after 15 years maturity“.
Note-Effective from 1st April, 2016, one can close the PPF before the maturity. But this will be permitted in genuine cases like a serious ailment, higher education of children etc,. In addition, if you try to close the PPF before maturity, then there will be a 1% reduction overall amount as penalty. This closure is allowed only to those accounts, which completed minimum 5 years of a term.
1% reduction of interest from a whole amount as penalty for earlier closure is unwarranted. Because it is already set that such closure will be allowed in genuine cases. Then why such penalty clause?
# What if you deposit more than the prescribed limit of Rs.1,50,000 in a financial year?
Any amount you deposit in your PPF account more than the prescribed limit of PPF for that particular year will not earn any interest. Also, this deposit will not be part of Sec.80C limit. Currently both PPF and Sec.80C limits are Rs.1,50,000. So you may not feel the heat of it. But in case the PPF limit kept it as Rs.1,50,000 and Sec.80C limit raised to Rs.2,00,000, if you deposited Rs.2,00,000 into PPF account means the remaining Rs.50,000 will not be eligible for Sec.80C deduction.
Such excess amount will be idle and will be returned to you by Accounts Office to the subscriber. Hence, never try to deposit more than the prescribed limit for that particular year.
# What if you opened two PPF accounts?
Legally you are not allowed to open two PPF accounts. One person must have only one PPF account. Suppose you knowingly or unknowing opened two accounts in Post Office, Bank or one in the post office and another in a bank, then the SECOND account will be treated as an irregular account. Even you can’t open another account if you already have one discontinued PPF account. You have only option to continue it with a penalty and minimum subscription. Such second account will not carry any interest. So in such situation what to do?
The solution is, you have to write a letter to Under Secretary-NS Branch MOF (DEA), New Delhi-1 through the Accounts Office giving detail of each account and request for combining of both accounts.
# Opening PPF accounts in joint names not allowed
Yes, PPF account can be opened either individually or as guardian of minor kid. But PPF account can’t be allowed to open as a joint account.
# What to do when minor kid attains the major of PPF account?
When the minor kid attains the majority, then he will be treated as account holder of PPF but not the legal guardian. Such major kid should submit the revised application form for opening account and nomination form. His signature on the application form will be attested by the guardian who opened the account of the minor or by a respectable person known to the Accounts Office.
# Nominees not allowed to deposit in PPF account after the death of account holder
In case of death of account holder, nominees or legal heirs not allowed to deposit into PPF account. If they deposit the amount, then such amount will not earn any interest and will be refunded back at the time of account closure.
# Loan or withdrawal on discontinued account
Loan or withdrawal will not be allowed on a discontinued account. To avail loan or withdrawal facility, you have to continue the account by paying the prescribed penalty and minimum subscription for the discontinued period.
# When you will get back the amount from your discontinued PPF account?
If your PPF account is discontinued, then you will get the amount along with interest only at maturity. As I said above, even withdrawal or loan facility is not allowed to such discontinued account. You will be allowed to continue such discontinued account only during a tenure of 15 years of PPF account. You can’t activate it after maturity. Such accounts will earn interest up to maturity ONLY.
Keep in mind that such discontinued account will earn interest on every year till maturity on the balance available for each year.
# Opening new account after maturity of existing PPF account
You are allowed to open new PPF account after maturity existing PPF account only if you not extended it. If you extended for another block of a year (whether with or without contribution), then you are not allowed to open one more PPF account.
# Repayment of loan on PPF
I already wrote a detailed post on how and when you can avail the loan on PPF at PPF-Loan and Withdrawal and 15 Rules of availing Loan against PPF (Public Provident Fund). You have to repay the principal within 36 months. You can repay the loan either in a single lump sum or in installment if you not pay the principal within 36 months, then the interest rate on such loan will be 6% instead of 2 %. Such interest will be automatically debited from PPF holder’s account.
In case of death of account holder, the it is the responsibility of nominee or legal heir to repay the interest rate.
# Nomination facility of PPF account
You can nominate one or more nominees to your PPF account. However, nomination not allowed to an account opened on behalf of minors. You can change or cancel the nomination at any point of time during PPF account period. It is purely free service. There is no cost to this process. If the nominee is minor then the account holder can appoint the guardian. You can’t nominate a trust to your PPF account.
Also after the death of account holder, PPF account will not stop to earn interest on such balance. The interest is payable till the end of the month preceding the month in which payment of the deposits is made to the nominee/legal heirs of the deceased subscriber.
Nominees are not allowed to continue the account. However, they are free to open the account on their own name. Because PPF account is not transferable.
The nominee does not get the right of ownership. He is only authorized to collect the money on the death of the subscriber and keep it with him as a trustee for the benefit of the persons who are entitled to it under the law of succession. Such payment to nominee does not deprive the legal heirs and holders of succession certificate to receive the amount in the hands of the nominee.
The account holder has to mention the % of share in case the nominee is more than one person. If such % is not mentioned then the amount payable will be shared EQUALLY among all nominees.
# What if in case of death of guardian or minor kid?
- In case of death of guardian-As per PPF rule, the guardian is not the account holder of PPF but a minor kid is treated as an account holder. Hence, in the event of the death of a guardian, the account will not CLOSE. Hence, surviving natural guardian or a guardian appointed by the competent court may continue the account of minor after producing necessary guardianship certificate.
- In case of death of minor kid-As I said above, minor is the actual account holder. Hence, the account will close. Guardian of the account will not claim the amount. But he acts like a facilitator for transfer of fund the legal heir of a minor.
# Whether women can change the name after her marriage to PPF account?
Women are allowed to change the surname after their marriage. For this, the woman PPF account holder must give a written request and the evidence of marriage
# Attachment of PPF account under any decree or order of court and Income Tax Department
As per Section 9 of PPF act, PPF Account can’t be attached under any decree or order of the court to recover any debt or liability incurred by the account holder. However, Income Tax Authority is free to attach and recover the dues of an account holder.
# Tax Benefits for the deposit in PPF account after the maturity of 15 years
You will enjoy the same tax benefits even after maturity also ONLY if you exercised the option of extending it with a contribution. However, if you not closed the account or opted for an extension without contribution, then any contribution made to such accounts will be eligible for tax benefits under Sec.80C.
# Tax Benefits under Sec.80C
You will enjoy tax benefits for the amount you deposited into your, spouse and kids (MINOR OR MAJOR) up to the specified limit of Sec.80C.
Interest earned yearly is tax-free. Hence, it is not considered as an investment for a fresh claim under Sec.80C. Also, note that the loan repayment towards PPF account will not form the part of Sec.80C benefits.
# Power of Attorney facility not available for PPF account
The Power of Attorney can neither open the PPF account nor operate it on behalf of an account holder.
# Cheque or DD realization date is the deposit date
In case of deposit through cheque or DD, the realization date of an amount will be treated as the deposit date. Hence, let us say you deposited the cheque or DD into your PPF account on 4th April, 2016 but the amount actually realized on 10th Apri, 2016 means the deposit date for interest calculation will be not 4th April, 2016 but 10th Apri, 2016.
Refer our other posts related to Public Provident Fund or PPF.
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