PPF-The Silent Growth Tool

1.    In our previous discussion on “Organising for Investment”, we had talked about opening a Public Provident Fund (PPF) account. PPF is open to all citizens without any age limit, meaning it can be opened for minors as well as adults. It makes great sense to open an account each for self, spouse and children. While one might not be able to avail of tax benefits in all accounts simultaneously, there are other significant advantages which can be accrued by all. The account can be opened in addition to the General Provident Fund, like DSOPF with the employer. The good part is that while the GPF/DSOPF will cease to exist after retirement, the PPF account can be carried for life.

2.    Number of Accounts. As per rules all adults can open one account in their name. Account for minors can be opened with either father or mother as their guardian. So effectively you can open one account each for each member of the family. However, there can be only one account in any minor’s name. Meaning that both father and mother acting as guardians cannot open two different accounts for the same child.

3.    Limit to Subscription. An adult can contribute a total of 1.5 lakhs combined in his own account as well as minors account for which he/she is a guardian, every year. So, in a family one can safely contribute a total of 3 lakhs each year. Any excess contribution will either not be accepted by the system, or will be returned without interest. While earlier, due to paper procedures, it was extremely difficult to link all accounts and keep track of them, people used to subscribe 1.5 lakh in each account, ie in own account as well as the minors’ account. However, this is illegal, and with present technologies, also easy to detect. Once the child becomes adult, then he/she is the owner of the account and can subscribe 1.5 lakh individually. So effectively the subscription limit increases by 1.5 lakh per child as they attain adulthood.

4.    Example. Consider a family of four- Mr & Mrs Sharma and their two minor kids Bunty & Bubli. The options for account opening and subscriptions are as under:-

(a)  Mr Sharma has one account, and is guardian of two minor accounts of Bunty & Bubli. Mrs Sharma has her own account. Mr Sharma can contribute a total combined amount of Rs 1.5 lakh in his and two minor accounts of Bunty & Bubli. Mrs Sharma can contribute 1.5 lakh in her account. Total contribution in family will be Rs 3 lakh.

(b)  Mr Sharma has one account and is guardian of one minor Bunty. Mrs Sharma has one account and is guardian of Bubli. Mr Sharma can contribute 1.5 lakh combined in his and Bunty’s account. Mrs Sharma can contribute 1.5 lakh combined in her and Bubli’s account. Total contribution will be Rs 3 lakhs.

(c)  Mr Sharma has one account. Mrs Sharma has her own account and is guardian of two minor accounts of Bunty & Bubli. Mr Sharma can contribute 1.5 lakh in his account. Mrs Sharma can contribute 1.5 lakh combined in her account and Bunti, Bubli’s account.

(d)  When Bunty & Bubli cross 18 yrs of age, the Sharma’s have four independent accounts in each  member’s name. They can contribute 1.5 lakh in each account making a total contribution of Rs 6 lakh.

5.    Risk. The scheme is government guaranteed, and therefore carries no risk.

6.    Returns. The interest rates are fixed periodically by the govt. The prevailing rate is 7.1%. Though the rates have reduced over time, at any given time the rate is always the best risk- free return with no tax liability.

7.    Tax Benefits. PPF falls under the EEE category ie, exemption at the time of investment limited to Rs 1.5 lakh; exemption on returns ie the interest earned, and exemption at the time of withdrawal. Both husband and spouse can claim the rebate under Sec 80 C for subscription up to 1.5 lakh each.

8.    Legal Protection. Another good feature of the PPF is, that the account is legally protected and cannot be attached to any claim in case of debt or liability.

9.    Benefit of Compounding. The investment in PPF may not sound very glamorous and attractive. However, over a period of time one would realise that it delivers most assured and best risk-free returns. The lock in period of 15 years might seem long, but it is just the right time to benefit from the power of compounding. The interest is not paid out every year but gets credited to the account, giving the benefit of compounding. If one contributes Rs 1.5 lakh, every year for 16 years, then at prevailing rates of 7.1%, the corpus will grow to over Rs 42 lakhs. Two accounts will make it about Rs 85 lakhs.

10. Maturity. The account matures in 15 years counted from the end of the year in which the first subscription was made, effectively making it 16 yrs. If one opens accounts for kids, then by the time they grow old enough to earn and contribute themselves, they will have a PPF account which would have either matured, or is nearing maturity. Thereafter they can keep it extended with contributions, thus enjoying risk free, tax free returns with high liquidity due to very limited/negligible lock in period.

11. Options on Maturity. When the account matures after 15 years, there are three options as under: -

(a)  Withdraw Entire Amount. You can close the account and withdraw the entire corpus.

(b)  Extend with Contribution. The account can be extended for another 5 years with annual contribution. The account can be extended multiple times with no limit. However, the option has to be intimated to the bank vide Form H, failing which the contributions made after maturity will not get any interest. The option has to be exercised within one year of account maturing. Once you have extended the account and started making contributions, up to 60% of the balance that was accumulated at the time of extending the account can be withdrawn. However, only one withdrawal is allowed in a financial year.

(c)  Extend Without Contribution. If no option is exercised, this is the default option. However, one cannot contribute during this time. The account keeps receiving interest annually as per prevailing rates. The amount can be withdrawn any time in lumpsum or parts. Only one withdrawal is permitted in a year. This feature is of use when you don’t need funds at maturity, and also do not have any other better option for investment. One can just continue to earn interest hitherto and withdraw only when required.

(d)  Premature Closure. Premature closure is permitted after 5 years under some specified requirements/circumstances viz medical, educational or residency related issues. However, the accrued interest will be reduced by 1 % if the account is closed prematurely.

12. Liquidity Before Maturity. Before the maturity period, partial withdrawals, limited to 50% of the balance after 4th year of subscription are permitted after five yrs. There is also provision of loan after 3rd year at interest rates which are 1% higher than the PPF rates.

13. Common Oversights. As the subscription period is long, it is quite common for many to stop monitoring their accounts and some omissions happen as under: -

(a)   Missing contribution.  One may forget to make the minimum contribution of Rs 500/- in any year before maturity, or during the extension with contribution period. The account is de-activated in these conditions, but can be easily re-activated at a penalty of Rs 50/- for each missed year along with the minimum contribution of Rs 500/- for that year.

(b)  Not exercising Option at Maturity and Continuing Contribution. It is so possible that one continues to contribute to the account even after 15 years, without having exercised his/her option through Form H. In this case, the account becomes irregular and the excess contribution does not receive any interest. Regularising it is a slightly tedious process, for which one has to apply to Ministry of Finance (DEA), NS Branch.

14. Key Takeaways. 

(a)  Open one PPF account each for self, spouse and children. Not necessary that you subscribe the upper limit, ie 1.5 lakh in each account.

(b)  Remember to make the minimum subscription of Rs 500/- every yr in each account.

(c)  Remember to do the necessary documentation when children attain the age of 18, to make them independent owners of their account.

(d)  Remember to exercise your option to withdraw/extend with contribution/extend without contribution, and submit the appropriate form within one year after maturity.

(e)   If the account has become de-activated, or irregular due to oversight, take up necessary action for re-activation/regularisation at the earliest.

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