PPF is a good instrument for investors as it allows flexibility and tax benefits.
Investor: There are a lot of options under section 80 C. Which, according to you, is the best one?
Advisor: Though it will differ from investor to investor, in my view, Public Provident Fund or PPF is among the best instruments under section 80C.
Investor: How does one open a PPF account?
Advisor: You can open an account in your own name or in the name of a minor, if you are the guardian. An account can also be opened on behalf of a Hindu Undivided Family (HUF). You can also have a separate PPF account, in spite of having an Employees' Provident Fund (EPF) account.
However, you can have only one PPF account in your name. Account can be opened with a at State Bank of India or Bank of India, Central Bank of India and Bank of Baroda as well as and at any head post office or general post office.
Investor: What is the duration of the account?
Advisor: On paper, it is a 15-year account. However, the tenure actually works out to 16 years, since you can make a contribution in the 16th year also.
Investor: What is the minimum balance to keep the account alive?
Advisor: Not less than Rs 500 and not exceeding Rs 70,000 in a financial year in lump sum or in instalments of Rs 10 but not more than 12 instalments in a year.
Investor: How are returns decided on PPF?
Advisor: The interest is fixed by the government. At present, it is 8 per cent compounded annually. To get the maximum returns, make deposit in the first few days of the month.
Investor: Are withdrawals possible?
Advisor: The entire amount can be withdrawn on maturity after 15 years.
However, you can also withdraw before maturity from seventh year onwards, but only once every year. The amount to be withdrawn should not exceed 50 per cent of the balance at the end of the fourth year or the year immediately preceding the withdrawal, whichever is lower. If you continue the account after 15 years and continue to deposit, you can withdraw up to 60 per cent of the balance at the beginning of each extended period (block of five years).
Investor: Can I get a loan from my PPF account?
Advisor: Yes, you can take a loan from the third year onwards. However, you cannot take a loan after you become eligible for the withdrawal facility. The loan amount should not exceed 25 per cent of the amount to your credit at the end of the preceding financial year.
Investor: What are the tax benefits?
Advisor: The deposits (even those in the name of your spouse or minor children) are eligible for a tax deduction. Interest accrual and withdrawals are also exempt from income tax, and the balance in the account is exempt from wealth tax. For entrepreneurs, there is an added advantage as your PPF account cannot be attached by the courts, in case their business goes bankrupt.
Investor: From the retirement planning point of view, how good is the product?
Advisor: PPF account is the most effective tax-saving vehicle giving you amazing benefits because
- Your money is absolutely safe.
- You have the flexibility of contributing varying amounts of between Rs 500 and Rs 70,000 a year, depending on your financial situation. The account can be kept "alive" by depositing just Rs 500 a year.
- The income from PPF is fully exempt from income tax.
Investor: What are the drawbacks?
Advisor: Very few.
- The tenure of the PPF scheme is 15 years, which makes it less attractive for older people.
- Although partial withdrawal is allowed from the seventh year, it is limited to 50 per cent of the balance in your account at the end of the fourth year.
The writer is a chartered accountant
