Public Provident Fund (PPF) An Analysis

Last Sunday, Chander, one of my friends, visited my house for dinner with his newborn baby. After dinner when we were sitting together he was much worried about the educational expense of this newborn (pls don’t laugh because every new parent in India is worried about this problem) and his second problem was that he is not interested in Equity Market (either directly or through a mutual fund). He just wanted to invest in some 100% safe investment like FD etc. with some guaranteed rate of return. I suggested to him about the opening of the PPF account in the name of his minor son. He got a bit confused about the word PPF (he has heard of this word but was not aware of the nitty-gritty of the PPF). He bombarded a lot of questions on me viz.

1. What is PPF?
   As mentioned in the title the abbreviation stands for Public Provident Fund.
2. Who can Open it?
   Resident Indians can only open a PPF Account. NRIs are not allowed to open the PPF Account but Resident Indian who later becomes NRI can continue the PPF Account till maturity.
3. Can the minor also open?
   Yes, Account can be opened in the name of Minor.  But minor’s contribution will be considered part of the parent’s contribution (who is depositing) and the maximum limit of Rs. 1.50 Lacs has to be kept.
4. Who can deposit? Father or Mother?
   any parent can deposit.
5. Can a Salaried Employee also have PPF?
   Yes, Any resident Indian can open a PPF Account.
6. What is the minimum/Maximum Amount one can Invest?
   Minimum Amount to be deposited per annum is Rs. 500/- and the maximum amount is Rs. 1,50,000/- per account.
7. Will he be entitled to Tax Benefit?
   Yes, the Depositor can claim the benefit u/s 80-C of the Income Tax Act, 1961.
   
8. What is the return expected?
   Presently the rate of return is 7.9% per annum and is being revised quarterly by the Government depending upon the interest rate situation in the country.
9. Is the interest/return Taxable?
   No, the interest on PPF is not Taxable. It falls in the EEE category meaning tax benefit at the time of deposition, returns also tax-free and maturity is also tax-free.
10. Will the maturity proceeds be taxable?
    As explained above the maturity of PPF is not taxable. It is EEE i.e. exempt at all the three stages viz. deposition, annual return, and maturity.
11. What is the lock-in period?
    PPF account is opened for a period of 15 years and it cannot be closed before that but partial withdrawal is allowed at the end of the 7th year (50% of the balance standing at the end of 4th Year). In the case of Account being opened with ICICI Bank partial withdrawal is allowed even after 5th Year.
12. Can I close it Early?
    Premature Closure is not allowed till 5th Year and after that closure is allowed on certain specified grounds like life-threatening ailments to depositor or dependents on him/her. In case of the death of the depositor, the account can be closed by submitting the desired form.
13. Can I get a loan against PPF Investment?
    Yes, the loan can be availed off against the balance outstanding in the PPF account but subject to certain conditions.Now one interesting point about PPF is if deposited before 5th of the month then interest is earned for the whole month. In case one is having idle funds and deposited 1.5 Lacs every 5th April for the 15 years then his investment of Rs. 22.50 Lacs will become an amount of Rs. 43,60, 517/- (provided government keeps the rate of interest at the present level and depositor deposits the funds before 5th April Every year to earn the interest for the full year).

Generally, investment in Mutual Funds through SIP earns better returns but as mentioned above Chander was not interested in any risky investment (As mutual funds carry a risk of market fluctuations) so for him, PPF is a better choice. Till the time his newborn attains the age for higher education, his father would be ready with his one-time admission fee.

In case of any further queries please feel free to write at pmanocha@pansofin.com