One of the most frequent question that client’s usually ask me as a tax advisor is “Which is a good option, for investment for tax saving purpose.” One of the options I suggest is “Public Provident Fund Scheme” which is a scheme that Government allows us to build our retirement savings and also gives us some great tax benefits. We always look to invest basically for the long term that also gives us twice as much of investment.The Public Provident Fund was established by the Government to provide retirement security to employed and self-employed individuals in the country.
A Public Provident Fund is a long-term investment option introduced by the Government of India which is risk-free with attractive interest rates. PPF has always offered high interest rates ranging between 8.5 to 9% and the interest rate has been 8.70% per annum from April’2014. This investment scheme is an EEE – exempt – exempt – exempt scheme where the amount invested, interest accrued and maturity proceeds all are exempt from tax.
The interest accrued on PPF account is exempted from tax. Investments can also be claimed u/s 80C as deduction up to Rs.1,50,000. The rate of interest on a PPF account is fixed on an annual basis. Interest on your PPF account is calculated on the minimum balance in your account between the 5th and the last day of every month. The interest is compounded annually and credited on 31 March every year. But this account has a lock-in period of 15 years. PPF account matures only after a period of 15 years from the year end in which the account was opened. In-case if one is not in need of money when the PPF account matures, the tenure can be extended for a period of 5 years for any number of times. If at all one chooses to extend the tenure of his / her PPF account, it must be done within 12 months from the date of maturity. On the maturity of PPF, the amount will be tax exempt.
All Indian residents are eligible to open a PPF account.
Non-resident Indians are not eligible to open a PPF account. If an individual has opened a PPF account when he / she was a resident in India, and later became NRI during the period of the PPF account held, such persons will be eligible to continue investing in the PPF account until the maturity. These funds held in PPF account cannot be transferred overseas and will have to be used only in India.
Recently, an amendment was made to the PPF, where upon if a resident holding a PPF account becomes a non-resident during the tenure of the account, the account will be closed on the date he/she becomes a non-resident and the interest payable will also be stopped from the same date.
One can withdraw only starting from the seventh year after the completion of 5 financial years from the year end in which you made the first deposit to open the account. Only upto 50% of the balance in the account can be withdrawn from the account at the end of the fourth year.
Example: Mr. Rahul invested in his PPF account on 1st May, 2011 that is FY 2011-12. As per the rules he can start withdrawing only after completion of 6 financial years that will be FY 18-19. So Rahul can withdraw from his PPF account only post 1st April, 2018.
Interesting part is that one can also take Loans from PPF Accounts
Loan can be applied up to a maximum limit of 25% of the balance in the PPF account at the end of the second year. He/ she will be eligible to avail the loan facility between the third financial year to the sixth financial year or up to the end of the fifth financial year. The repayment of the loan can be done within 36 months in one lump sum or in two or more instalments. The interest amount should be paid within a maximum of two monthly instalments and the rate of interest on loans from your PPF account is 2% on the principal amount. E.g. Ajay opened a PPF account on 3rd Jan 2013 and invested Rs. 1 lakh. Assuming that he did not deposit anything further, then in this case he can take a loan from 1st April 2014 of upto 25% of the balance as on 31st March 2013, that is Rs. 25,000.