PPF: 7 things you should know about Public Provident Fund

Interest rates of small savings schemes have not been changed. In the fixed income space, the PPF rate is one of the highest. Here are a few things to know about this scheme.

1. Interest rate is assured but not fixed
The interest rate offered on the PPF is not fixed but linked to the 10-year government bond yield. The rate doesn’t change on a day-to-day basis but is fixed at the beginning of a quarter based on the average bond yield in the previous three months.

Consistent decline
The 10-year bond yield to which PPF rate is linked has fallen 147 points in the past 18 months.

2. Tenure can be extended
A PPF account matures in 15 years. After the account matures, you can either withdraw the entire balance and close the account or extend it for five years with or without making further contributions. The extension in blocks of fi ve years can be done indefinitely.

• Extending with contribution

If you want to continue the account and also contribute, you have to submit an application to the Post Office or bank before the end of one year of maturity. The account will then get extended for five years.

• Extending without contribution

If you do not inform the bank or Post Office, the account is automatically extended. But it will not accept contributions. The balance keeps earning the normal interest and you can make only withdrawal in a financial year.

3. There is adequate liquidity
A 15-year tenure does not mean your money is locked up for that long. The 15-year term is from the day of opening the account and the lock-in progressively reduces. In the 14th year, it is only one year. If you opened your PPF account in 2006, the lock in ends next year.

In case of an emergency...

• Withdraw from account...

After the sixth year, you can withdraw up to 50% of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower.

• … or take a loan at 1%

If the account has not completed six years, you can take a loan from the third year till the sixth year. The loan is capped at 25% of the balance at the end of year previous year. It costs 1% per year and has to be repaid within three years. Till a loan is repaid, an investor cannot take further loans.

4. Don't skip investing or put too much in PPF in a year
You must contribute at least Rs 500 and at most Rs 1.5 lakh in your PPF account in a year. The minimum investment of Rs 500 has to be maintained even for accounts extended beyond 15 years.

• If you don’t put in minimum Rs 500 a year, the account becomes dormant. There is a Rs 50 penalty for reactivating a dormant account.
• If you put in more than Rs 1.5 lakh in a year, the excess amount, even if credited by mistake, will not earn any interest.
• The maximum limit of Rs 1.5 lakh per year includes the contribution in PPF accounts in the names of minor children.

5. Interest is calculated before 5th of month
PPF interest is compounded annually but the calculation is done every month. The interest is on the lowest balance between the 5th and last day of every month. 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 at least 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.

6. Loaded with tax benefits

7. Additional tax benefits of PPF
Open a PPF account in the name of your spouse or child to gain additional tax benefi ts. As per tax laws, if money gifted to a spouse is invested, income from investment is clubbed with that of giver. Since PPF income is tax free, it does not push up tax liability of giver. So one can invest up to Rs 1.5 lakh a year in this tax-free haven.

PPF compared with other investments

*Mutual fund returns is past 10-year average; ** Rs 50,000 exemption for senior citizens

What do new RBI bonds offer?

• The RBI has replaced its 7.75% bonds with new savings bonds that are offering 7.1%.
• The new bonds have a floating rate of interest that will be 35 basis points above the prevailing NSC interest.
• Interest will be paid twice a year, on 1 January and 1 July. It will be fully taxable and there will be 10% TDS deduction.
• One can't use Form 15G or H to escape TDS. The exemption will require a full certification from the tax department.
• The bonds have a lock-in period, which depends on the age of the bondholder. It is seven years for regular investors below 60. For those between 60 and 70, it is six years. Between 70 and 80 it is five years and for those above 80 it is only four years.
• Bonds are not tradeable or transferable. You can’t even take a loan against them. If the bondholder dies, his nominee will have to wait till maturity.
• There is no limit on the amount that can be invested in these bonds.
• Bonds will be held in electronic form but there is no need for a demat account.