Public Provident Fund is a very popular scheme in India. But It has been popular mainly because of the reason that it earns tax free interest and provides deduction under section 80C. But it is also a very useful tool for Retirement Planning. To understand how it can be a useful tool for Retirement Planning let us first understand the Public Provident Account Scheme fully.
The Public Provident Fund Scheme came into force w.e.f . 1st July 1968 by Govt. of India notification.
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Who can open Public Provident Fund Account?
- Any Individual can open PPF Account.
- PPF Account can also be opened for minor by his guardian.
- PPF Account cannot be opened for HUF (Hindu Undivided Family), AOP (Association of Persons) and BOI (Body of Individuals).
- Non Resident Indians cannot open PPF account. But in case where the account was opened by a Person when he was an Indian Resident and subsequently he became Non Resident Indian the account can be continued by making subscriptions till it matures on Non Repatriation Basis.
Mode of Holding.
- PPF Account can be opened only in single name (joint account cannot be opened.).
- Nomination Facility is available in PPF account.
Tenure of PPF Account:
- PPF account matures after expiry of 15 years from the end of financial year in which the account was opened. For example the account opened on 01/01/2000 will mature on 01/04/2015.
- PPF account can be continued for a block of 5 years after maturity. This facility is available for any number of blocks after expiry of extended period. The continuation can be with or without contribution. Once an account is continued without contribution for more than a year, the option cannot be changed. Non Resident Indians cannot extend their PPF Account.
How much amount can be deposited in PPF?
- Minimum Amount of Deposit: During a financial year minimum Rs.500/- should be deposited in the PPF Account.
- Maximum Amount of Deposit: During a financial year maximum Rs. 1,50,000/- can be deposited in a PPF account.
- Subscription should be in multiples of Rs.5. Maximum 12 deposits can be made in financial year.
What are the tax implications of PPF account?
- Subscriptions made in the PPF account during the year are eligible for Deduction u/s 80c of The Income Tax Act 1961.
- Interest earned in the PPF account is completely exempt from Tax U/s 10 of The Income Tax Act 1961.
Interest Rates:
- The Interest rate for PPF account are decided by the Govt. of through notification in official Gazette. Right now the interest rate is 8.1% p.a.
- PPF interest is calculated monthly on the lowest balance between the end of the 5th day and last day of month, however the total interest in the year is added back to PPF only at the year-end.
Loan Facility:
- There is a loan facility available. An investor can borrow any time after completion of 5 years. The amount of loan cannot exceed 25% of the balance in account at the end of second year immediately preceding the year in which the loan is applied for.
- A fresh loan is not allowed when a previous loan or interest is outstanding. Interest rate is 1% if repaid within 36 months and at 6% on outstanding loan after 36 months. The repayment must be made either in lump-sum or installments.
♦ It is recommended to avoid loans since interest is paid out of non taxable interest and therefore the advantage gets diluted.
Partial Withdrawals:
- Partial withdrawals are allowed beginning from 7th year and every year thereafter. An account holder can withdraw 50% of his balance at the end of the 4th or the 1st previous financial year, whichever is lower. For example, if the account is opened in financial year 2001-2002. You may add 6 years to the financial year and i.e. 2002+6=2008 (FY 2007-2008). Accordingly, the 4th preceding year will be 2008-1 = 2007 (FY 2006-2007). So the amount of 1st withdrawal in the 7th year, FY 2007-2008 is 50% of the balance to the credit as on 31-03-2004 or 31-3-2007, whichever is lower.
- In post maturity continuation without fresh subscriptions, any amount in part or full, can be withdrawn in installments but not exceeding once in a year.
Notes:
- A PPF account is not subject to attachment (seizure of the account by Court order) under any order or decree of a court. However income tax authorities can attach PPF accounts to recover tax dues.
- A person can have only one account in his name. Two accounts even at different places anywhere in India are not permitted.
Conclusion:
As PPF generates a tax free interest, one can plan part of his retirement corpus in PPF account and there is also an option where if one continues his PPF account without fresh deposit then he can withdraw any amount from it every year. So in that case if Husband and wife both start contributing regularly to their PPF accounts at early age and create a good corpus till their old age they can continue their PPF account without contribution and withdraw any amount every year. So as a conclusion one should put a part of his Retirement corpus in PPF Account.