Sanjukta Ghosh, a Delhi-based editorial professional earned an extra amount more than Rs. 10000 per month apart from her monthly compensation. Last year, she ended up paying an income tax of Rs.30000. Which is when her financial planner advised her to invest in a public provident fund account. Since then, Ghosh has been diligently keepin aside a certain percentage of her income in her PPF account.
The PPF happens to be one of the most popular savings instruments in India. One of the main reasons for the popularity of the government-backed schemes happens to be the tax benefit it offers, that is – exempt, exempt and exempt or EEE tax status. Such a tax benefit is seldom provided by other investment instruments, thereby making the PPF a favourable investment option by the average salaried Indian. However, is this all that is there to PPF? Well, there are certain things about PPF that many of us are unaware of.
The subsequent paragraphs take a look at some of the lesser-known facts about PPF that can probably help you make a more informed investment decision. Take a look:
As per government rules, a minimum contribution of Rs. 500 per year and a maximum of Rs. 1,50,000 per annum is allowed. The uppermost limits of Rs. 1.5 lakh is applicable on all accounts either held under her/his name or on behalf of a minor. You can either choose to contribute on a monthly basis or make a lumpsum contribution. But the maximum number of contributions allowed in a financial year is 12.
It is a known fact that PPF comes in with a lock-in period of 15 years. But were you aware that the maturity date is not calculated from the date of the account opening? As per the PPF scheme rules, the maturity date is calculated from the end of the financial year in which the sum of money was deposited. It does not matter which month or day/date the account was opened.
For example, let’s say you made your first contribution July 1, 2016. The 15-year lock-in period will be calculated from March 31, 2017 and thus the year of maturity or maturity date, will be April 1, 2032.
Since the lock-in period of a PPF scheme starts from the end of the financial year in which the deposit was made, you make 16 annual contributions and not 15 during the tenure of the scheme. Let’s observe this example. You make a deposit on July 15, 2017 (time of opening account); this date will be taken as your first contribution, the next one in the financial year 2018–19 as the second one, 2019–20 as the third and so on.
The final contribution, i.e. the 16th will be made in the financial year 2031-32. The same goes for monthly contributions; therefore, you will be making 192 contributions (16x12) during the scheme’s tenure.
Experts are of the opinion that one must invest in PPF before the fifth of every month, if opting for monthly contributions. This is advisable because, the balance amount taken for calculation of interest is considered as the minimum between the fifth day of the month and the end of the month.
In case a holder opts for lump sum annual investments, it is advisable to do it before April 5 of every financial year. Even though the interest is credited on March 31 of every financial year, it is calculated on a monthly basis using the minimum balance at the above-mentioned dates.
Despite having a lock-in period of 15 years, the PPF account offers partial liquidity through partial withdrawals and even loans. However, availability of such benefits is subject to certain conditions depending upon the balance in PPF and number of years completed. The interest rate charged on loan is more than 2% of the interest earned on the scheme. The principal repaid amount is credited to the subscriber’s account and the interest paid on the loan is amassed to the government.
Nonetheless, from the 7th year onwards, as the holder becomes eligible to withdraw, then she is no longer allowed to borrow loans. Also, subscriber shall not be entitled to get a fresh loan until the earlier loan has been paid off along with the interest.
All of us aware of the fact that, only a resident individual can open a PPF account. And ownership of joint account is not possible. However, a minor is eligible to open an account with a guardian. It has to be either of the parents (not both) or a legally-appointed guardian.
Grandparents are allowed to open PPF accounts on behalf of their grandchildren only under circumstances when both parents have died; otherwise not. While an individual can open only one PPF account, an account opened on behalf of a minor (by an adult) is treated as separate.
On the other hand, in case you become an NRI, the earlier rule stated that an existing PPF account will be closed. However, the Ministry of Finance since February 23, 2018 has put the notification on hold.
To be continued in part II.