Introduction
It's the busy months of Dec, Jan, Feb, Mar and lot of people are exploring last minute investment options to save on income tax. What all things does an investor expect from an investment product? Let us try to list some of these expectations:
- First and foremost thing that comes to mind is the income tax benefits. In case of many people this is the very reason they begin their hunt for investment products. The investor expects income tax deduction benefit at the time of investment and the returns on maturity should be tax free.
- Second thing that comes to mind is the returns expectations and the risk involved. People expect that the risk involved should be low and the returns derived should be high or reasonable. Investors expect that the returns should be able to beat inflation.
- Third thing that comes to mind is the liquidity that the investment product offers. The investor expects that he should be able to make premature withdrawals or he should be able to take a loan against the investment that he has made in the product. If the product comes with both premature withdrawal facility as well as loan against the investment; then nothing like it.
- Fourth thing that comes to mind is the investment time horizon. The tenure should be flexible. Also the product should be a good long term investment tool for wealth creation. The investment product should be good enough to meet long term objectives/goals like retirement planning etc.
- Fifth thing that comes to mind is the flexibility of the investment product. The investor expects that the regular minimum amount and the maximum amount that can be invested in the product should be flexible.
Now which product offers you a combination of all these features? Well it is difficult to figure out an investment product that will offer you all these features exactly as you want them …… but the one that comes closest to meeting the maximum expected (required) features of an investment product is none other than PPF ……… Yes you got it right ….. We are talking about Public Provident Fund (PPF). This is one of the most popular tax saving and investment tool used by a vast majority of the population. So what is it that makes this product so popular among the investor community ……. Let's explore
Features of Public Provident Fund
Opening of Account
A PPF account can be opened with any authorized branch of the State Bank of India (SBI) or its subsidiaries or any post office or any other bank as authorized by the Government from time to time.
On opening a PPF account the investor is issued a passbook. The passbook contains the details of all the transactions that have happened in the account like date, deposits, withdrawals, interest etc.
A PPF account can be transferred from one bank branch to another bank branch or from one post office to another post office or from one bank branch to a post office or from one post office to a bank branch.
Safety
Public Provident Fund is a Government sponsored scheme. It is backed by the Government of India. Since the product comes with sovereign guarantee; it offers the highest safety and credibility. The safety of both the principal as well as the interest is assured.
Minimum and Maximum Amount
The investor has to deposit a minimum of Rs 500 in a year. This low amount ensures that even people belonging to lower income group can subscribe to PPF scheme.
The maximum amount that can be deposited in a year is Rs 70,000.
The investor can make a maximum of 12 deposits in a year. But this is not subject to 1 deposit per month. The investor can make the 12 deposits in a year at any time as per his convenience and the liquidity available.
Tax Benefits
The contribution made to a PPF account upto Rs 70,000 every year qualifies for deduction from taxable income under Section 80C of the Income Tax Act.
The maturity proceeds received from a PPF account are tax free in the hands of the investor. This means the interest earned on the PPF account is tax free.
PPF accounts are also exempt from wealth tax.
Also balance in a PPF account cannot be attached under a court order due to any debt or liability of the investor. This is beneficial to business people.
Returns
The Government announces the annual interest rate payable every year on PPF deposits. Presently the interest payable on PPF is 8% compounded annually.
The interest paid on the PPF account is tax free in the hands of the investor.
An interest rate of 8% and that too tax free is effectively much more than 8% if the person falls in the 30% tax bracket. Let us compare this PPF 8% tax free return with another debt instrument like Bank FD which is also offering 8% return. The interest earned on Bank FD's is taxable and this effectively reduces the post tax return below 8%. In such a scenario PPF becomes much more lucrative as compared to bank FD's.
Although the interest paid on PPF is not fixed and announced every year by the government; the rate is very stable as any rate change will affect crores of people who have invested in the scheme.
Tenure
The tenure of the scheme is for 15 years. However on maturity if the depositor wishes to continue then the account can be extended for a block of 5 years at a time and the investor can continue making deposits.
However if the depositor wants to continue with the account without making any further deposits; in that case also he can still continue with the account.
On PPF accounts that are extended, one withdrawal per year is permissible.
PPF account is a very good long term investment tool for wealth creation. It can also be used as a retirement planning tool.
Loans and Partial Withdrawals
A person can take a loan against his PPF Balance between the 3rd year and the 6th year.
A person can make partial withdrawals from his PPF Account from the 7th year onwards for meeting any emergency requirements.
Also from the 7th year onwards the person can make a withdrawal from his account and deposit it again as a fresh contribution for that year. For this contribution also the person can avail tax benefits under Section 80C. So this way he does not need to put fresh money from his pocket. So it becomes like a self sustaining fund from there on.
Interest Calculation
The interest on the PPF balance is credited to the account on 31st March every year.
For interest calculation the lowest balance between the 5th of the month and the last date of the month is used. So it is good practise to deposit money in your PPF account before the 5th of the month to take full benefit of the interest.
Other Miscellaneous Features
For self employed people, professionals and businessmen who do not have access to Employee Provident Fund (EPF), PPF can serve as an excellent investment tool.
There is no age restriction for opening a PPF account.
In case of PPF joint accounts are not allowed. The account has to be in a single name.
PPF accounts come with Nomination facility. Premature closure of account is permissible only in case of death of the investor. On the death of the investor the proceeds of the account are passed on to the nominee. On death of the investor the nominee cannot continue to operate the account. The account has to be closed in such cases.
Non Resident Indians (NRI) cannot open PPF account.
If the investor doesn't make a deposit of Rs 500 in a year; then a penalty is levied.
If for whatever reason the deposit is not made; the account becomes discontinued. Such accounts cannot be closed before the tenure of 15 years. However a discontinued account can be activated (regularized) by paying up the respective amounts (minimum Rs 500) for every year of default and the penalty.
Conclusion
Apart from tax benefits, safety, good returns and flexibility the PPF scheme comes with lot of other benefits as discussed above. PPF serves the purpose of salaried class people as well as businessmen and self-employed persons. It serves as an excellent wealth creation and retirement planning tool. No wonder PPF is one of the most famous investment products in the country and is the darling of investors!!!!
So in case you don't have a PPF account; open one today.
