PPF: Leveraging The Hidden Opportunities

Public Provident Fund or PPF as it is commonly known is a fund where one can invest to build a retirement corpus. Though there is no age limit prescribed for PPF account, the tenure is 15 years. One can open a PPF account in any of the nationalized banks, specified by RBI or any post office. The scheme specifies a minimum investment amount of Rs 500 and maximum of Rs 70,000 in a fiscal year.

The current rate of interest for PPF is 8%, which is compounded and paid annually. The interest rate may change from time to time, as per government notifications. However, to utilize your PPF account fully; you need to look at the following points:

Remember 5^th of Every Month

Keep an eye on the calendar for making contributions in PPF account. The interest on your PPF account is compounded annually but in actual practice, the calculation is on monthly basis. The interest is calculated on the lowest balance between 5^th and 30^th of the month, which means, if you invest after the 5^th of month, the contribution will not earn interest for that month.

Investments in Child’s Name

Till now, PPF comes under EEE category for the purpose of taxation. This means that all the proceeds at the time of maturity will be exempted from tax. However, once the DTC (Direct Tax Code) will be implemented, proceeds will attract tax at the time of maturity. Here, there is advantage in store if you open a PPF account in the name of your child as the proceeds will be taxable in the hand of your child (who becomes major at the maturity of PPF) and tax will be deducted as per your child’s tax slab.

Here, you can reduce the tax liability, if your child is non-earning at the time of maturity of PPF or falling under the lower tax bracket than you.    

Tax Deduction for 16 Years

A PPF account runs for complete 15 financial years. However, you can get tax exemption for 16 years. For instance, if a person open a PPF account and start investing in it in the month of January, he will be eligible for tax exemption in that financial years and on the subsequent 15 financial years, starting from 1^st of April after the account opening. This will make it tax exemption for 16 years, including the year of opening PPF account.

Extend Tenure

Once the tenure of 15 years is completed, one can extend the tenure of PPF account for 5 years at a time, to a total of 30 years and keep investing in it to build the sufficient corpus for retirement. Also, tax exemption under Section 80 C of I-T act will be available in all the extended years.

Gain Liquidity in Emergency: Loan / Withdrawal Against PPF

Although not advisable, yet your PPF balance can bail you out of financial crisis, if needed. The option of loan is available from 3^rd financial year from the date of opening of the account. Here, one can avail up to 25 per cent of the amount deposited by the end of first financial year. The loan facility in PPF can only be utilized only in 3^rd, 4^th and 5^th financial year after the opening of PPF account. Here, one can tale loan for multiple times if the earlier loan is repaid completely. The interest rate on loans against PPF account is 1 per cent per month for 3 years and, thereafter, 6 per cent interest rate would be charged on monthly basis.

In addition to loans, withdrawal facility is also available in PPF accounts from 7^th financial year onwards, from the date of opening the account. Here, in 7^th year, you can withdraw up to 50 per cent of the balance, available at the end of 4^th financial year or immediate preceding year of withdrawal, whichever is lower, depending on the loan taken, if any.

So, while having a PPF account can create your pension corpus, little awareness and carefulness usage can increase its potential manifold.