Saving is an old Indian tradition. To harness this trait and encourage the common man to access viable avenues of savings, Government of India has sponsored a wide range of schemes. These products offer easy enrolment through different channels like post offices, public and private sector banks. Their simplicity and abundance is an attractive proposition to the strategic as well as a casual investor. Each product is endowed with unique features that are perfectly suited to an individual with diverse needs and addresses particular segments of society. Being fully guaranteed by the Government of India, it bears the stamp of reliability and reasonable returns.
Investment Savings products:
These are mostly in the form of long-term investments designed to meet your future needs. The tax benefits accrued is a bonus that is an additional lure. Some of the attractive products on offer are:
- National Savings Certificate: A popular instrument for the salaried class.
- National Savings Scheme.
- Kisan Vikas Patra: Aimed at the agriculturists.
- Public Provident Fund (PPF): A long-term savings option for the taxpayer with multiple benefits.
- Sukanya Samriddhi Yojana: It is aimed exclusively for the girl child.
- Senior Citizen Savings Scheme: The target is the senior citizens offering attractive return
Advantages of savings products:
These government-sponsored products are of multiple advantages to you. Some of the major plus points are:
- Readily available.
- A wide range of products on offer.
- Simple to enroll.
- Caters to your long-term financial planning.
Public Provident Fund (PPF):
Of all the products under discussion, the PPF occupies a special place. It was launched in the year 1968 by the Ministry of Finance, Government of India to encourage savings among Indians in general and to help them create a retirement corpus. It is a major tax saving vehicle with a saving component that offers you with a reasonable and consistent return on your investment. It aims to satisfy your long-term financial goals. It is also one of the most tax efficient instruments in India.
Key features of the PPF Scheme:
The features that make this scheme such an attractive option to explore is outlined below:
- Any resident individual can open a PPF account, including in the name of a minor
- Only one account is permitted per person
- Initial Deposit: 500
- Maturity period: 15 years
- Annual deposit: Minimum Rs.500 and maximum Rs.1.5 Lakhs
- Nomination: Permitted
- Joint account: Not permitted
- Loan facility: Allowed after three years up to the 6th year
- Withdrawal: Permitted partially from the seventh year onwards
- Extension: For a further period of 5 years after maturity
- Interest: Consistently high- 8% from 1st October 2018
- Tax: The investment, interest and the maturity amounts are all tax-free
- Transfer: Easy portability exists
Benefits of PPF Scheme:
The PPF accounts come with a host of advantages as enumerated below:
Long-term investment strategy:
PPF provides you with long-term financial planning with a deposit period of 15 years, of which the lock-in period is of 7 years. With annual compounding of PPF interest rates, effective returns tend to be more attractive than term deposits with banks.
It meets your retirement goals by helping you to build a healthy corpus by the long tenure of maturity, compounded interest, tax-free returns and capital protection making this an ideal option.
By the exempt-exempt-exempt (EEE) regime, you get tax-free interest and withdrawals and tax-deductible investments.
The default risk is low as it is fully government backed.
You can open a PPF account in all nationalized public sector banks or post offices and select private banks which enjoy an extensive reach. Additionally, you can open the PPF account online also.
Your PPF funds cannot be laid claim to by creditors or attached under a court order.
Eligibility for PPF account:
Individuals who are residents of India, including minors, are eligible to open PPF accounts, subject to certain riders. The detailed criteria for an opening of PPF facilities are:
- You can have only a single PPF
- Any resident Indian, who has attained 18 years of age, can register for PPF.
- PPF in a minor’s name is accepted for those who are not yet 18 years in age. However, the maximum collective limit for tax exemption remains Rs.1.5 lakhs.
- Grandparents are barred from investing on behalf of their minor grandchildren.
- If you are a Non-resident Indian (NRI), you are barred from owning a PPF passbook.
- HUFs are not allowed PPF facility, effective from 2005.
- Foreigners are prohibited from investing in PPF.
Investing in PPF is critical to your long-term objective in financial planning. It is not out of place to mention that for good measure you learn the jargon associated with this important investment tool. It includes a number of well-defined form for a specific use.
It is the account opening for Public Provident Fund (PPF). It is a bit elaborate where all your personal details are incorporated. You have to provide your full name, communication and permanent address, details of PAN card and your specimen signature. Specify the initial amount you want to invest. In the case of a minor, guardianship inclusive of the relationship with you has to be specified.
It is a form you use for a transaction of deposits related to PPF.
An application is requesting partial PPF withdrawals.
A request application seeking a loan from PPF.
Addition of nominee to your PPF is done through this form. More than one nominee can be specified which is inclusive of the percentage to be shared. Nomination in a minor PPF is permitted.
In case you want to change your nominee, this form is necessary.
Submission of claims by your nominee is done by using this form.
Extension of maturity on completion of 15-year tenure is achieved through this form.
Opening a PPF Account:
There are two major ways of opening a PPF account. You may open an account either by a visit to the nearest post office, bank or online. Of late, the operation of internet banking accounts online is popular among the younger generation who find it convenient and time efficient.
You may open an account for an amount as less as Rs.100, but the total annual deposit in your account should be a minimum amount of Rs.500 to keep the account live. Traditionally, accounts were chiefly opened through post office, but with online banking gaining popularity, you are now opting to open accounts with banks. Many of the banks try to woo customers with value added services such as instant account balances and mobile updates.
Post office or bank:
Banks and post offices act as agents of the government, Submission of duly filled in forms along with supporting documents and the minimum amount of deposit allows you to complete the process of opening the account.
You can open accounts online by accessing a bank’s official portal. If this access is impossible, you can also try accessing the site through third-party (financial services provider) sites that provide banking services. When you open an account with the bank, you have to adhere to the terms and conditions proposed by the bank. Now, most banks offer many facilities online such as linking accounts, online transactions and viewing account statements online.
Maintenance of PPF deposits:
You are mandated to deposit a sum of Rs.500 at the minimum every year and to a maximum of Rs.1.5 lakhs to keep the account operational. Your failure to do so will render your account inactive. You are permitted to deposit the amount in a lump sum or in a maximum of 12 installments in a financial year, but restricted to 2 in a month within the overall installment limit. However, the government can change these limits if it deems it fit.
Reactivation of PPF account:
As already explained, the minimum deposit is mandatory to keep your account live. However, in the event of your failure to do so and default, your account turns inactive. The account can be reactivated by your express request to that effect by submitting the relevant form and paying a penalty of Rs.50 for each year of inactivity. Even if you missed paying in an intervening year but paid subsequently, the entire period beginning from the default year will be considered inactive, and you will have to pay the fees per year for that many years plus the minimum annual deposit to reactivate the account.
Withdrawals from PPF Account:
Partial withdrawals are allowed after completion of 6 years and from the 7th year onwards, but it is limited to only once a year. However, between the 3rd and 6th years you can avail of a loan as per extant rules. The withdrawals are capped at the lower of:
- One half of the gross balance at the end of the fourth year, counting back from the year of withdrawal; or
- One half of the gross balance at the end of the year before the year of withdrawal, only one time in a financial year.
Extension or Renewal OF maturity of PPF Accounts:
The normal maturity period of PPF account is 15 years. You may opt to extend it for a further period of a 5-year block with or without additional investments.
- Without a fresh investment, your account will continue to earn interest on the balance. You are also allowed to withdraw funds once every year.
- With fresh investment, the normal interest will be applied on the new balances arrived at after adding the investments. However, withdrawal is restricted to 60% of the balance held at the beginning of each five-year extended block.
Application of interest in PPF account:
The PPF is a fixed income debt instrument offered by the government. The current rate of interest declared by the Central Government is 8% for the period 1st October to 31st December 2018. The interest is compounded annually and credited to the account at the end of every financial year. Every month the balance reckoned for calculation of interest is the 5th. You should, therefore, deposit money into the account on or before 5th of the month.
Factors affecting PPF Interest Rates:
The government of India ascertains the rate of interest on PPF account based on prevalent economic conditions. The usual principle is to set it in line with or above inflation rates at a premium of a quarter or half percent on rates of 10-year government bonds.
Closure of PPF account:
The normal closure of PPF is at the end of 15 years, if not extended for a further five-year block. The entire amount held as well as the accrued interest can be freely withdrawn and the account is closed.
Premature closure of PPF account:
In case of severe cash crunch, PPF rules have been amended recently where an account may be closed after five years only on the following conditions:
- Treatment of serious ailments affecting you, your spouse, dependent children or parents.
- To fund your education or that of the minor.
Tax benefits of investing in PPF Scheme:
The popularity of this scheme is to a large extent because of its tax savings, especially those who are looking for retirement corpus. Essentially it falls under the EEE (Exempt, Exempt, Exempt) tax category.
- Deposits are exempt under 80C of the IT Act, 1961 to a maximum limit of Rs.1.5 Lakhs.
- Interest earned is tax exempt.
- Withdrawal amounts are wealth tax exempt.
This scheme was designed to promote savings in general and tax savings in particular by the National Savings Institute of the Ministry of Finance in 1968. Even after a lapse of 50 years since its inception, it has remained one of the most potent financial instruments. Its popularity seems to be on the rise as evident from the broadening spread of the delivery channels of this scheme.