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Public Provident Fund - PPF

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  #1  
Old 25th February 2005, 09:33 AM
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Default Public Provident Fund - PPF

Public Provident Fund - PPF

The pros and cons of Public Provident Fund - PPF

The BEST of of Public Provident Fund - PPF (Pros)

1. Lowest risk possible

There is no chance of someone running away with your money. Or later on being told that there is no way your money can be returned to you. The PPF is a government-backed scheme, so you can be sure the government will not default. This is the highest security an investment can have and, therefore, the safest.

2. Tax rebate on money invested

Under Section 88, PPF contributions (along with your subscriptions to other schemes that qualify for Section 88 benefits), are eligible for a 20% tax rebate. The maximum you can invest in PPF to avail of the rebate is Rs 70,000 per annum.

3. Great returns

An investment in PPF will earn you 8% per annum. But because of the tax rebate, your actual return of 8% works out to be higher.

Moreover, the returns are compounded. That means you not only earn interest in the money you put in, but you earn interest on the interest earned, too.

Let's say you put in Rs 60,000 in the first year. You will earn Rs 4,800 as interest rate. The next year, your interest rate will be computed on Rs 64,800 (Rs 60,000 + Rs 4,800) as well as whatever fresh amounts you deposit.

4. No tax on interest earned

The interest earned is totally exempt from tax under Section 10 (11) of the Income Tax Act. The 8% per annum that you get will not be taxed.

5. Flexibility of investment

You can invest up to a maximum of Rs 60,000 per annum in the PPF. Some categories of investors, like authors, can go up to Rs 70,000. The minimum that you must put in every year is Rs 500.

Besides having such a huge leeway in terms of the amount of money to be invested, you can invest the money in up to 12 installments. You don't have to put it all in one go. Each installment can be whatever amount you want it to be. They need not all be identical.

6. Exempt from all wealth tax

All the balance that accumulates over time is exempt from wealth tax.

Also, should you default on any loan payments or declare bankruptcy and cannot repay your loans, the amount in your PPF account cannot be attacked by the courts.

The worst of of Public Provident Fund - PPF (Cons)

1. The interest rate keeps changing

It was initially 12% per annum, dropped to 11%, then 9.5% and is now 8%. This rate of interest is fixed by the government and there is nothing you can do about it.

How to make this work for you: If the interest rate on PPF declines, interest rates on all other deposits (company and bank) and bonds also declines. So, frankly, there are no other alternative fixed-return investments that can compete because, overall, the interest rates are declining.

2. Lengthy lock-in period

Fifteen years to be exact. But, in actuality, it works out to 16 years since the last contribution is made in the 16th financial year.

Even if you make an investment on the last day of your account (the day it is due to mature), you will still get a tax rebate. But, of course, you will not earn interest on that amount on the last day.

How to make this work for you: Use this as a retirement planning tool. Money you will never touch. If you are just 22, you will get the money when you are around 38. You can use it to prepay your housing loan then.

3. Interest is calculated on the lowest balance

Interest is calculated on the lowest balance between the fifth and the last day of the month of March.

Let's say you have Rs 100,000 in your PPF account and on the 10th, you deposit an additional Rs 10,000. Your interest will be calculated on Rs 100,000 (not Rs 110,000).

How to make this work for you: If making a last minute deposit at the end of the financial year, do so before March 5.

4. Lack of liquidity

Your money is stuck for years on end. It is not as easy as selling some shares or mutual fund units.

How to make this work for you: Take a loan from the third year of opening your account to the sixth year. So if the account is opened during the financial year 1997-98, the first loan can be taken during financial year 1999-2000 (the financial year is from April 1 to March 31).

The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. In this case, it will be March 31, 1998.

If you repay the loan in 36 months, interest will be charged at 12% pa. Otherwise, interest will be charged on the outstanding sum at 6% per month. You can obtain a second loan before the end of the sixth financial year if the first one is fully repaid.

You can make a partial withdrawal only after five financial years are completed from the end of the year in which the initial subscription was made. So, in effect, it works out from the seventh year onwards.

The amount of withdrawal is limited to 50% of the balance in your account at the end of the fourth year immediately preceding the year in which the amount is to be withdrawn; or at the end of the preceding year, whichever is lower.

For example, if the account is opened in 1993-94 and the first withdrawal is made during 1999-2000, the amount of withdrawal will be limited to 50% of the balance as on March 31, 1996, or March 31, 1999, whichever is lower.



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  #2  
Old 2nd March 2005, 09:41 AM
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Default Who can open a Public Provident Fund PPF account?

Who can open a Public Provident Fund PPF account?

Anyone can open a PPF account, either on his/her own behalf or on behalf of a minor. Being part of a General Provident Fund or Employees’ Provident Fund scheme does not disqualify you from subscribing to the PPF, but at no point are you allowed to have two PPF accounts in your own name at the same time. Doing so will invite a penalty: if the issuing authority (bank or post office) detects two accounts during the tenure of the scheme, you will get only your principal back. Also, two adults cannot open a joint PPF account -- an account has to be opened singly, but can have one or more nominations.

It's a good practice to open a separate account in the name of your spouse (or your minor children) and keep contributing to it -- you can even claim the tax benefit from the contribution made to accounts in your spouse's or minor children's names. In this way you could save tax-free funds even for your children and spouse.

Consider opening a PPF account even if you are not a taxpayer, and keep it active. When you do become a taxpayer, you will have an account that will mature early. Remember, however, that any change in the interest rate will apply to you too, even if you've been maintaining an old account.

NRIs who wish to avail of rebate on their income in India are also eligible to open a PPF account. Subscriptions, however, will have to made from their NRO account on a non-repatriable basis.
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  #3  
Old 2nd March 2005, 09:44 AM
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Default Where can you open an Public Provident Fund - PPF account?

Where can you open an Public Provident Fund - PPF account?

You can open a PPF account at any branch of the State Bank of India, its associated banks such as the State Bank of Mysore or Hyderabad, or in a few other nationalised banks. You can also open an account in any head/selected grade post office or a General Post Office.

Even so, you might find it easier to open an account at a post office instead of a bank. Banks are often reluctant to open PPF accounts because they get no additional money to handle these accounts and the money is credited to the RBI the same day. It has been the experience of some people that they needed 'contacts' in the bank to open their PPF account!

Wherever you do open an account, you will be given a passbook in which all subscriptions, interest accrued, withdrawals, loans and so on, are recorded.
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Old 2nd March 2005, 09:45 AM
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Default How long can you maintain the Public Provident Fund - PPF account?

How long can you maintain the Public Provident Fund - PPF account?

The term of a PPF account is 15 years. Even so, the effective period works out to 16 years because you are allowed to make your last contribution in the 16th financial year. Why should this interest you? Because even if you make a contribution on the last day, you still get the tax rebate, although you won’t earn any interest on the amount.
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Old 2nd March 2005, 09:46 AM
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Default How much, and how often can you invest in a Public Provident Fund - PPF account?

How much, and how often can you invest in a Public Provident Fund - PPF account?

During a financial year, you can contribute a minimum of Rs 500 and a maximum of Rs 70,000. If you are putting in money in instalments, remember that you can't make more than 12 instalments a year. There's more flexibility in the scheme: unlike a bank recurring deposit, you don't have to deposit the same amount every month -- you can put in Rs 2,000 in one month, and Rs 58,000 in another.
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Old 2nd March 2005, 09:47 AM
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Default Do you have to invest every year in a Public Provident Fund - PPF account?

Do you have to invest every year in a Public Provident Fund - PPF account?

Yes. Your account will become defunct if you don't deposit the required minimum of Rs 500 a year. The amounts already deposited will continue to earn interest, which will be paid to you at the end of the term (15 years), but you can't take loans or make withdrawals.

You can revive your account by paying a fee of Rs 50 for each year that you default, along with subscription arrears of Rs 500 for each such year. And don't worry if your account is discontinued -- you will not be debarred from opening a new one.
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Old 2nd March 2005, 09:48 AM
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Default Can you make withdrawals from your Public Provident Fund - PPF account?

Can you make withdrawals from your Public Provident Fund - PPF account?

The entire credit balance in your PPF account is yours to withdraw when it matures -- at the end of 15 years. Meanwhile, you can make withdrawals within specified limits. The first withdrawal can be made from the seventh year. Subsequently, you can make one withdrawal every year. You can withdraw up to 50 per cent of the balance at the end of the fourth year or the year immediately preceding the withdrawal, whichever is lower.
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Old 2nd March 2005, 09:50 AM
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Default Can you get loans form your Public Provident Fund - PPF account? How?

Can you get loans form your Public Provident Fund - PPF account? How?

You don't have to wait to withdraw from your PPF account to get some money from it -- you can get a loan on your PPF from the third year. You can get a loan equal to not more than 25 per cent of the balance in your PPF account.

You can repay the loan in a maximum of 36 instalments. The interest on the loan amount is 1 per cent a year, but will be hiked to 6 per cent a year if the loan, or a part of it, remains unpaid even after 36 months. New loans are disbursed only after you pay up earlier loans. If you do decide to withdraw money -- after the seventh year, of course -- remember that you cannot take a loan in addition.
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Old 2nd March 2005, 09:51 AM
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Default Tax benefits and other concerns about your Public Provident Fund - PPF account

Tax benefits and other concerns about your Public Provident Fund - PPF account

The interest credited to your account, as well as withdrawals from it, are exempt from income tax. The balance held is fully exempt from wealth tax, without any limit.

The balance in a PPF account cannot be attached under an order or decree of a court. What that means: if you're involved in a legal dispute, a court cannot attach or question the money in your PPF account -- as it can with your other personal property.

As a PPF account holder, you can nominate one or more persons. In the event of your death, the amount in your account will be paid to your nominee or legal heir even before the end of 15 years. However, if the balance is not withdrawn, it will continue to earn tax-free returns. It is advisable to open a savings account of the nominee or nominees in the same bank and mention this number in the PPF account opening form. Also, since a single cheque is issued in favour of all the nominees, it would be prudent for the nominees to open a joint bank account.

The account can be transferred to any scheduled bank or post office in India.
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Old 2nd March 2005, 09:53 AM
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Default What's the interest you earn from your Public Provident Fund - PPF account?

What's the interest you earn from your Public Provident Fund - PPF account?

The money that you deposit in the Fund earns interest at a rate that the government fixes periodically.

The interest rate is 8 per cent (effective March 1, 2003 ), compounded annually. Interest is calculated for a calendar month on the lowest balance in your account between the close of the fifth day and the end of the month, and is credited to your account at the end of each year.

So, to derive the maximum from your investment, put in your deposit in the first few days of a month. The monthly contributions will earn simple interest till the end of the financial year.


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