Highlights of Public Provident Fund
Public Provident Fund, popularly known as PPF, is a savings cum tax saving instrument. It also serves as a retirement planning tool for many of those who do not have any structured pension plan covering them.
Public Provident Fund account can be opened at designated post offices throughout the country and at designated branches of Public Sector Banks throughout the country. The account can be opened by an individual in his own name, on behalf of a minor of whom he is a guardian, or by a Hindu Undivided Family.
- Minimum deposit required in a Public Provident Fund account is Rs. 500 in a financial year. Maximum deposit limit is Rs. 1,50,000 in a financial year. The maximum number of deposits is twelve in a financial year.
- The account matures for closure after 15 years. The account can be continued with or without subscriptions after maturity for block periods of five years. Premature withdrawal is permissible every year after completion of 5 years from the end of the year of opening the account.
- Loans from the amount at credit in Public Provident Fund amount can be taken after completion of one year from the end of the financial year of opening the account and before completion of the 5th year.
- Interest at the rate notified by the Central Government from time to time is calculated and credited to the accounts at the end of each financial year.
- Income Tax rebate is available “on the deposits made”, under Section 88 of Income Tax Act, as amended from time to time.
- Interest credited every year is tax-free.
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- The Public Provident Fund Scheme has Introduced by Central Govt. on 1st July 1961.
- Under this scheme “Guardian” in relation to minor means, Father, Mother, Either or Parents
- A person entitles under the law for the time being in force to have care of the property of the minor, where neither parent is alive or where the only living parent is incapable of acting.
- Under the Public Provident Fund Act, 1968 “Year” means 1st April to 31st March.
- The account under this scheme can open in any branch of State Bank of India, and its subsidiaries, or in any Head Post Office or any Selected Post Office or any of Nationalized Bank.
- Any resident Individual, above 18 years old can open only one account in his own name or any resident Individual can open an additional account on behalf of a minor of whom he is guardian can open an account in this scheme. A Public Provident Fund account holder who subsequently becomes NRI may continue without repatriation benefit up to maturity. The old account holder of HUF/AOP also allowed continues by NRI without repatriation.
- A Public Provident Fund account cannot be opened in joint names or as a company.
- Notification dated 13/05/05 has discontinued opening of the PPF account on behalf of HUF/AOP/BOI.
- Notification dated 25/07/03 has prohibited NRIs from opening a Public Provident Fund account.
Subscription and Frequency
- A minimum amount of Rs. 500/- p.a. in multiple of Rs. 5/- is to be deposited in a PPF account in the financial year.
- The minimum amount one has to deposit in a financial year is 500/- (cannot be paid in installment) & in multiples of Rs. 5/- and the maximum amount one can invest in PPF is Rs. 1,50,000/- whether in his name or jointly with minors and in maximum 12 installments one can deposit in a year.
- A PPF account will be discontinued if a minimum amount of Rs. 500/- not deposited in a year but it can be restored with a deposit of Rs. 50/- per year of default plus minimum subscription.
- If anybody invests more than 1,50,000/- in the financial year it will be irregular account, interest will earn up to Rs. 1,50,000/- and balance will be returned and no tax benefit on the amount which exceeds Rs. 1,50,000/-.
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Terms and Transferability
- On can transfer his Public Provident Fund account from one office of SBI or its associates to Head Post Office or vice versa.
- The term/duration of PPF account is 15 years from the end of the financial year in which the account is opened but can be extended for one or more block of 5 years after 15 years.
- An individual can continue the account for any period without further deposit, under this arrangement the balance in this account will continue to earn interest at a nominal rate till the account is closed.
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Loan Facility in PPF
- A loan can be taken after the expiry of one year from the end of the year in which initial subscription is made but before the expiry of five years from the end of the year in which initial subscription was made. Application for the same has to be made in form D (Download Form D for PPF Loan).
- A loan is allowed up to 25% of the balance of PPF account including interest at the end of the second year immediately preceding the year in which the loan is applied.
- A loan can be taken only once a year. The second loan can be taken on full payment of the first loan. One should repay his principal loan taken from his PPF account before the expiry of 36 months from the first day of the month following the month in which the loan is sanctioned.
- The repayment of principal loan taken from the PPF account can be made by the subscriber in a one lump sum or in two or more monthly installments within the prescribed period of thirty-six months.
- Interest on loan taken from PPF account is charged @ 1% per annum.
- After the principal of loan is fully repaid, the subscriber shall pay interest on loan taken from PPF account is not more than two monthly installments @ 1% per annum of the principal for the period commencing from the first day of the month following the month in which loan was obtained to the last day of month in which loan is fully repaid.
- If loan taken from PPF account is not repaid in 36 months then the interest rate will increase to 6% per annum and will be debited each year to the subscriber’s account.
Withdrawal from Public Provident Fund
- The subscriber can avail the withdrawal facility from the PPF account after the expiry of the 5 financial years from the end of the year in which the initial subscription was made by applying in form C.
- Only one withdrawal in a year is allowed.
- Beginning from the 7th financial year and every year thereafter, an account holder can withdraw maximum 50% of the balance to his credit at the end of the 4th or the 1st immediately preceding financial year, whichever is lower, less the outstanding loan amount.
- When the withdrawal facility starts, no loan is available.
- After completing 15 years into PPF account, if the subscriber continues with fresh subscriptions, he is entitled to withdraw a total of up to 60% of the balance at his credit at commencement of the said period, but not more than a year.
- But if he only retains the balance in his account, he can withdraw the entire sum in one, or more, installments, but not more than once a year.
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Tax, Interest and Other Benefits
- The interest recoverable against the loan taken from PPF account shall accrue to the Central Government.
- U/s 80C of Income Tax Act, 1961 investment in PPF is qualified for the deduction. Investment in PPF account earns interest which gets revised quarterly but gets compounded annually.
- The interest earned in the PPF account is tax-free under section 10(11) of the income tax act.
- Deposits credit balance under in PPF account is free of Wealth Tax.
- A PPF account can be attached by the Income Tax and Estate Duty authorities only. But it has immunity against attachment under a decree/order of a court of law.
- PPF has the lowest risk in default. Liquidity in PPF is poor but loan/partial withdrawals are available.
Nomination in Public Provident Fund
- Nomination can be done in the name of one or more persons.
- The nominee cannot continue the account of the deceased subscriber in his/her own name. Under the PPF Act where there is no nomination in force, the balance of subscriber’s account will be paid to legal heirs of the subscriber’s on the production of succession certificate/probate, when the PPF balance is more than 1 lakh.
- And any when the balance is less than 1 lakh it can be paid to legal heirs by producing a letter of indemnity/ an affidavit/ a letter of disclaimer/ the death certificate. PPF has the best income yield, tax benefits.
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Other Important Provisions
- After the death of the account holder, the account can either be closed or continued without contribution. If it is not closed, it continues to earn interest but fresh contribution and partial withdrawal are not permitted.
- The contribution by parents to the PPF account of the minor is treated as a gift by parents to a minor child. The contribution by the husband to the PPF account of his wife is treated as a gift by the husband to his wife. In case of PPF account of a minor, the ownership of gifted corpus and the interest earned belong to the child.
- In case of maturity of PPF account of a minor, which is now major at the time of maturity, the entire amount belongs to him or her, and any income on reinvestment of this amount will not be clubbed with parents.
- A guardian can withdraw from minor’s PPF account only for the need of the child such as expenses for his education, medicine, etc. by given a required declaration.
- The PPF account gets a credit of the contribution amount on the date of deposit by local Cheque, not on clearance, unless the Cheque bounce, but for outstation Cheque, it will be the date of realization (outstation Cheque should be issued adding collection charge). Thus one can deposit his Cheque on the last date of the month and not lose interest for the month on the saving bank account.
- Interest is calculated on the lowest balance between the close of fifty days and the last day of every month. The interest on PPF account is credited to the account on at the end of each Financial year i.e. 31st March.
- A subscriber can contribute to PPF on the last day of the 16th Financial year, i.e. by locking the money for 1 day he will not get any interest but he can claim a tax rebate on the investment amount.
- In the absence of the parents, grandparents can contribute to the grand children’s PPF account, and then they can claim deduction U/s 80C. (Contribution to PPF of minor children only by parents and they are eligible for the deduction. And there is a joint ceiling of Rs. 1,50,000/- on contribution to the account of parents and minor child.)
- The assessee cannot contribute over Rs. 1,50,000/- to his own account. Section 80C(4) of Income Tax Act 1961, allow deduction on PPF contribution made, in the case of an individual, the individual, the wife or husband, and any child of such individual, and in any case of HUF, any member thereof.
- This means that after having contributed Rs 90,000/- to his own account, one can make an additional contribution of Rs. 60,000/- to the account of a spouse or the major children, even married daughter. But his married daughter can only deposit balance Rs. 90,000/- in her PPF account. And the deposit of Rs. 60,000/- which is made by his parents is shown as a gift by her parents. The deduction for which is available to the account holder.
- A PPF account can be self-funding, i.e. without investing fresh capital. After opening PPF account, from the 7th year onwards on can withdraw an amount equivalent to his annual investment from his accrued PPF account, and deposit the same back as his contribution for that particular year.
- If PPF holder dies before the account matures, a nominee can take any of the following the action
- Close the Account,
- Continue the account till it matures,
- Fresh contributions are too allowed.
- If a guardian of minor dies before the maturity of PPF, then, in this case, the minor is treated as a subscriber, and the amount in the account does not become payable.
- Under Section 8 of the PPF Act, the account of minor remains operative and new account need not be opened. The surviving nature guardian appointed by the court can continue the account of minor after submitting the necessary guardianship certificate.
- In the event of the death of the minor subscriber, the balance of PPF account is payable to legal heirs of the minor.
- A subscriber having a discontinued PPF account cannot:
- Open new PPF account,
- Raise a loan,
- Take withdrawals
- If HUF is dissolved, the PPF account will not be closed.
- On the death of Karta, the HUF PPF account will not be closed, but continued by new Karta.
- The PPF account cannot be opened in joint names. On the death of subscriber in case of individual PPF account, it can be closed before maturity.