Invest Public Provident Fund Online
The benefits of assured returns, power of compounding and tax free withdrawals on maturity have fuelled the popularity of this systematic savings plan
Warren Buffett said, 'Only buy something that you'd be perfectly happy to hold if the market shut down for ten years.' For tax savers, the public provident fund does one step better; it guarantees returns. This systematic savings plan, works on the dual benefit of power of compounding and regular investments.
Features
Eligibility You need to be a Resident Indian
Entry Age
- No age is specified for account opening
Investments
- Minimum: Rs 500 per annum
- Maximum Rs 1.50 lakh per annum
- A maximum of 12 deposits allowed in a financial year
Interest
- 8.10 per cent compounded annually
- The interest for the month is calculated on the minimum balance available in the account from 5th of a month to the last date of the month
Tenure
- 15 years.
- On completion of 15 years, the account can be extended by 5 years
- The PPF account matures after 15 years but the contribution has to be made for 16 years in all. The 15-year period is calculated from the financial year following the date on which the account is opened, effectively the PPF account matures on the first day of the 17th year
Account holding categories
- Individual
- Minor through the guardian
Nomination
- Facility is available
The public provident fund (PPF) is a long-term savings instrument established by the central government, which offers tax concessions on savings as well as withdrawal after the lock-in period. This scheme came into force from July 1, 1968 and is backed by the government with the objective of providing old-age income security to the self-employed and those working in the unorganised sector. Though the scheme is voluntary, the assured return and tax deduction on savings has fuelled its popularity.
Investment Objective and Risks
The primary objective of saving in the PPF account is to avail tax deduction on deposits, guaranteed returns on investment and tax free withdrawal on maturity.
Capital Protection
The capital in a PPF account is completely protected as the scheme is backed by the government of India, making it fully risk-free with guaranteed returns.
Inflation Protection
The PPF account is not inflation protected, which means whenever inflation is above the current guaranteed interest rate of 8.10 per cent; the deposit earns no real returns. However, when the inflation rate is below 8.10 per cent, it does manage a positive real rate of return.
Guarantees
The interest rates on this deposit will be notified before April 1 of that year, and is aligned with G-Sec rates of similar maturity, with a spread of 0.25 per cent. Currently the interest rate on PPF deposits is 8.10 per cent per annum which is guaranteed for the deposits made between 1/4/16 to 30/6/16.
Liquidity
The PPF is liquid, despite the 15-year lock-in stipulated with this account. The liquidity is offered in the form of loans and withdrawals subject to conditions.
Credit Rating
As the PPF is backed by the government of India, it does not require any commercial rating.
- Loan can be sought by the PPF account holder from the third year of opening the account to the sixth year, wherein the loan amount will be up to a maximum of 25 per cent of the balance in the account at the end of the first financial year. However, the loan has to be repaid with interest at 1 per cent interest per annum within 36 months.
- PPF accountholder can withdraw after the end of 6 years from the opening date of PPF subjected to the condition that maximum withdrawal allowed is 50 percent of the amount present in his account at the end of 4 years or the end of the year prior to which withdrawal is to be made, whichever is lower. For example, if the account is opened in 2010-11, and the first withdrawal is made during 2016-17, the amount one can withdraw is limited to 50 per cent of the balance as on March 31, 2013, or March 31, 2016, whichever is lower. Thereafter one withdrawal in every year is permissible.
Exit Option
Premature closure of a PPF account is not permissible except in case of death of the account holder.
Other Risks
Savings in this product is completely risk free because of the government-backing.
The balance amount in the PPF account is not subject to attachment under any order or decree of court in respect of any debt or liability.
Tax Implications
The sum invested in PPF account is eligible for tax deduction under Section 80C subject to a maximum savings of Rs 1.50 lakh in a financial year. On maturity, the entire amount including the interest is tax free. The deposit is also exempt from wealth tax.
Where to Open an Account
You can open the account at various places such as:
- Any head post office or general post office.
- State Bank of India or branches of it's associated banks like the State Bank of Mysore.
- Branches of nationalized banks permitted to collect direct taxes.
- Private sector banks such as ICICI Bank, Axis Bank, IDBI Bank.
How to Open an Account
Once you have selected the location to open an account you will need the following documents:
- An account opening form.
- Two passport size photographs.
- Address and identity proof such as copy of the passport, PAN (permanent account number) card or declaration in form No 60 or 61 as per the Income Tax Act 1961, driving license, voter's identity card or ration card.
- Carry original identity proof for verification at the time of account opening.
- Choose a nominee and get a witness signature to complete the formalities to get started.
How to Operate a Deposit
- You need a pay-in slip with the initial account opening sum to be credited into your account.
- You get a PPF passbook with your photo affixed stating the nominee you have selected.
The PPF account rules can be read in the passbook
Types of Transactions
- Cheque
- NEFT transfer
- Electronic clearing service (ECS)
Points to Ponder
- Minimum sum needed to start an account
- Penal provisions in case of loans and withdrawals
Tips and Strategies
Exhaust the full investment of Rs 1.50 lakh permissible to avail tax deduction on the first day of each financial year. This will ensure that your yearly investment of Rs 1.50 lakh earns interest for the complete year and enjoys the compounding effect of interest in PPF and accumulates significant sums over long term. For example investing Rs 1 lakh per year into PPF will accumulate Rs 36.81 lakh at the end of the 15-year PPF tenure of which the investment contribution is only Rs 18.50 lakh; the rest is the advantage of compounding.
Going Online
Online access to the PPF account is yet to completely take-off. Some banks such as SBI and ICICI offer online access to PPF accounts opened through them. With this facility you can make online deposits to your account.
PPF accounts opened at post offices do not have online access facility yet.
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