11 FEB, 2013, 10.25AM IST, ET BUREAU
The Public Provident Fund (PPF) may be one of the most popular tax-saving schemes, which can be opened in a post office or designated bank branches, but do you know the investment limit or the withdrawal time frame? Here’s how to familiarise yourself with this investment option.
1) How much is the interest rate?
The interest rate offered on the PPF is no longer fixed, but linked to the market. It is 0.25% above the 10-year government bond yield. This does not mean that the rate will change on a day-to-day basis. It will be announced every year in April, based on the average bond yield in the previous year. For the current financial year, it is 8.8%, but could recede next year. Bond yields have fallen below 8% in recent weeks and the average for 2012-13 has dropped to 8.25%. Analysts don’t expect the PPF rate to be more than 8.5% in 2013-14.
2) How does the interest accrue?
The interest on your PPF balance is compounded annually, but the calculation is done every month. The interest is calculated on the lowest balance between the fifth and last day of every month.
So, if you invest before the 5th, the contribution will earn interest for that month too. Otherwise, it’s like an interest-free loan to the government for a month. If you are investing through a cheque, make sure you deposit it 3-4 days before the cut-off date. If your bank is lethargic in crediting the amount to your PPF account, your investment might miss the deadline.
3) What are the tax benefits?
The PPF corpus is tax-free at all three stages. The investment is eligible for tax deduction under Section 80C. The interest earned is also tax-free, and so are withdrawals. The original draft Direct Taxes Code, introduced in 2010, had proposed withdrawal of tax benefit. Though it would have been with prospective effect and existing investments would have been exempt, there was strong opposition to the move. The revised draft DTC nixed the proposal. However, with P Chidambaram back as finance minister, the original DTC proposals may come back in some form. Make the most of this tax-free opportunity before the rules change.
4) How much can you invest?
The investment limit is Rs 1 lakh in a year through a maximum of 12 instalments. If your minor child has a PPF account, the combined limit for both accounts will be Rs 1 lakh. Don’t invest more than the Rs 1 lakh in a year, because if it is discovered, any interest earned by the excess amount will be reversed. There is also a minimum investment required. An investor has to put in at least Rs 500 in his PPF account in a year. You will be levied a small, but irksome, penalty of Rs 50 if you fail to do so.
5) When does it mature?
A PPF account matures in 15 years, but you can extend the tenure in blocks of five years after maturity. The balance continues to earn interest at the normal rate. The minimum investment of Rs 500 has to be maintained even for accounts extended beyond 15 years. This does not mean your money is locked up for this period. The lock-in period falls with every passing year. In the 14th year, it will only be one year.
If you need money, you can withdraw after the sixth year, but it cannot exceed 50% of the balance at the end of fourth year, or the immediate preceding year, whichever is lower. You can also withdraw only once in a financial year. You can also take a loan against it, but this cannot exceed 25% of the balance in the preceding year. The loan is charged at 2% till 36 months, and 6% for longer tenures. Till a loan is repaid, you can’t take more loans.