Public Provident Fund: 15 lesser known but important rules.
The Public Provident Fund (PPF) is one of the most popular savings vehicles in India. One of the reasons for this is the tax benefit it offers – it comes under the EEE (exempt-exempt-exempt) tax status. What this means is that at the time of investment, the interest earned, and proceeds received at maturity are all tax-exempt or free. Now, this is a fact that a lot of us know about. But there are a few things about the PPF that not many people are aware of.
Here are some lesser-known facts about the PPF that can help you make a more informed investment decision:
The maturity date
It is a widely known fact that the PPF comes with a lock-in period of 15 years. But did you know that the maturity date is not calculated from the date of the opening of account? As per the Public Provident Fund scheme rules, the date of calculation of maturity is taken from the end of the financial year in which the deposit was made. It does not matter in which month or date the account was opened.
Let’s say you made your first contribution on July 26, 2014. The lock-in period of 15 years will be calculated from the March 31, 2015, and the year of maturity, in this case, will be April 1, 2030.
As per the rules, a minimum contribution of Rs 500 per year and maximum of Rs 1.5 lakh per annum is allowed. The limit of Rs 1.5 lakh is applicable on all accounts either held under his/her own name or on behalf of a minor. You either make lump sum or monthly contributions, but it cannot exceed 12 in a financial year.
As the lock-in period of the scheme starts from the end of the financial year in which the deposit was made, if you make an annual contribution you make a total of 16, and not 15, contributions during the tenure of the scheme.
Let us go back to the example above. The deposit made at the time of opening of account on July 26, 2014, will be taken as your first contribution, the next one in the financial year 2015-16 as the second contribution, 2016-2017 as the third, and so on.
The last contribution, i.e. the sixteenth, will be made in the financial year 2029-2030. The same goes for monthly contributions, you will be making 192 contributions (16 x 12) during the scheme’s tenure.
It is recommended that one must invest in PPF before the fifth of every month in case of monthly contributions (in case of cheque, ensure that the payment to PPF is received). This is because the balance taken for calculation of interest is taken as the minimum between the fifth day of the month and end of the month.
In case lump sum investment annual investments, it is advisable to do it before April 5 of every financial year. This is because 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 date.
Any contribution made above the maximum ceiling limit is not eligible to earn any interest. For the October-December quarter 2017-18, the government has fixed the interest rate of 7.8 percent per annum.
We know that only a resident individual can open a PPF account, however, one must remember that joint ownership is not allowed. However, a minor is eligible to open a PPF account with a guardian. A guardian has to be only the father or the mother (not both) or a court-appointed guardian.
A grandfather or grandmother cannot open PPF account on behalf of their grandchild except in cases where both the parents have died. A person cannot open more than one account in his/her own name. However, an account opened on behalf of a minor is treated as separate.
Non-resident individuals (NRI), Hindu Undivided Families (HUF) or body of individuals (BoI) cannot invest in PPF.
Earlier, government had notified that the day an individual becomes an NRI, the PPF account will be closed. However, office memorandum of finance ministry dated 23 February 2018 has put the said notification in abeyance or temporarily dismissed.
Even though PPF has a lock in period of 15 years, it offers partial liquidity through loan and partial withdrawals. Availability of loans and withdrawals are subject to certain conditions depending on the PPF balance and number of years completed.
The interest rate charged on the loan is more than 2% of the interest earned on the scheme. The principal repaid is credited to the subscriber account and the interest paid on the loan is accrued to the government.
However, from the 7th year as you become eligible for withdrawal, then you are not allowed to take a loan. Also, a subscriber shall not be entitled to get a fresh loan until the earlier loan has been paid off along with the interest. Only one withdrawal is permissible during the financial year.
This facility is allowed only in certain cases and comes with conditions. To be eligible for premature closure of the account, you have completed at least five financial years.
Taxation on withdrawals
Since PPF comes under the EEE status, any withdrawals made before the expiry of lock-in period is exempted from tax. However, you are required to declare that you have withdrawn from PPF while filing your income tax returns.
A PPF account cannot be attached by a person or entity to pay off any debt or liability. Further, even a court order or decree cannot make a person liable to pay off his debts using money from his PPF account.
Penalty on default
If you don’t make atleast a minimum contribution, i.e. Rs 500, in a particular financial year, your PPF account will become inactive. To revive an inactive account, you will have to pay a penalty of Rs 50 per year for the number of years the account has been inactive along with a minimum contribution of Rs 500 per year.
If you discontinue your account, then you will not be eligible for loans and withdrawals until the account is revived by making a payment of penalty fees and minimum contributions. However, the account will be eligible to receive interest as per the prevailing rate.
Nomination facility is available. A person can nominate a minor in his/her account. However, no nomination is allowed in respect of an account opened on behalf of the minor.
Extension of 5 years
After maturity, a subscriber has the option to extend the maturity period of the PPF account in a block of 5 years. The account can be extended for ‘N’ number of blocks of 5 years each. It will continue to earn the prevailing interest rate even if you do not make any contributions. However, this extension must be given within a year of maturity.
During the 5 year blocks, you can only withdraw once a year. However, the amount that can be withdrawn during the five years cannot not be more than 60 per cent of the balance at the start of block.
A person has the option to transfer his/her post office PPF account from post office to banks (authorised by the government) or vice versa. Similarly, you can transfer your PPF account from one bank branch to another or to other banks as well.
Exemption from wealth tax
PPF accounts are exempted from the ambit of wealth tax.