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PPF accounts & PPF Calculators: 10 questions you should have about

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PPF accounts & PPF Calculators: 10 questions you should have about

Public Provident Fund (PPF), by definition, is a long-term savings scheme. Constituted under the ‘PPF Act of 1968’, it is a plan offered by the Central Government. It was initially introduced by the Government as it wanted to offer retirement security to workers in the unorganized segment and self-employed individuals. Currently, it is one of the most popular investment choices in India. People who are looking for a safe investment, tax benefits, a decent rate of return, and have a long-term horizon, should put in their funds in Public Provident Fund. It is a disciplined investment instrument because the fund is blocked for fifteen years.

When to open A PPF Account?

The short answer is NOW! There are certain things that people should give thought to when opening PPF account. They can open PPF account either in the post office or in the selected list of nationalized banks. The only prerequisites are one photograph and the PAN number. Once the formalities of application are completed, investors get a passbook in which they can record all their PPF transactions. Users are allowed to open just one account in their name. However, they can open an account in the name of their minor children. It would solely be the child’s account, and the parent will act as the guardian. There is no joint account facility in case of PPF. People who have an Employees Provident Fund Account or General Provident Fund Account can still open a PPF account.

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When to invest?

The most preferred time to invest in PPF is in the first week of any month, starting in April each year. The interest is computed for the calendar month on the minimum balance at credit of investor’s account, between the 5th day closing amount and amount recorded at the end of the month. The interest is credited at the year’s end.

Can NRIs invest in PPF?

As per the PPF guidelines, NRIs are not allowed to open a PPF account. However, if a resident who later becomes an NRI during the prevalence of the maturity period set under the PPF plan may continue with their investment in the account till maturity on a non repatriable basis.

Loan against PPF

People can avail loan facility against their PPF investment. They can avail the first loan in the third year after opening the PPF account. For instance, if a person opens an account during the year 2015-16, the first loan can be availed during the year 2017-2018. The loan limit will be 25% of the balance amount including interest for the 2015-16 in the account as on 31/3/2016. The availed loan can be repaid in 36 EMIs. The second loan can be availed against PPF before the sixth year ends. However, the facility of the second loan is available only when the first loan is fully paid.

Options available on maturity

Investors have three options available to them at the time of maturity. They can either withdraw maturity amount, or they can extend account duration by a 5-year block. It can be done as many times as investors want and contribute fresh funds. They also have the option to extend the duration of account without opting for additional contributions, and still earn interest on PPF amount every year. The maturity amount is exempted from tax. In case, the investors decide to extend the duration for five years block; they can make withdrawals up to 60% of the balance available at the start of the extended period. In order to extend PPF account, investors need to submit the mandatory documents for extension within one year of the maturity date. Also, investors can withdraw the PPF amount without any restriction only if they have decided to extend account period without opting for fresh investments. However, the withdrawal limit is limited to one time per year. The interest will continue to grow in the balance amount.

Withdrawals before maturity

Investors can withdraw the amount of not more than 50% of the preceding year's PPF balance or fourth year, whichever is less. However, this advantage is offered only after the completion of five years. In the case of loan availed on PPF account, the withdrawal limit gets reduced. Only one withdrawal is allowed in a single year. Investors have to submit Form C for withdrawal.

Prefer PPF loan over Personal Loan

Investors looking to get funds for a short period in the absence of any mortgage privilege, mostly avail the personal loan. However, if the investors have a considerable amount in PPF, then they can avail a loan against that amount. The interest levied is less than the interest rate of 13%-36% generally applicable in the case of personal loans.

Lump Sum Investment

Besides small savings, investors can invest a big amount at one go in the PPF account, which also makes investors eligible for the bonus. This lump sum amount will result in substantial maturity amount without pinching investors. Additionally, increased investment implies increased tax savings.

PPF calculation

There is increased confusion among people on how interest on their PPF amount is computed? As many investors are not aware of the computation, they have queries like when to invest, how much to invest, and others. Once investors know the process and interest computation method, financial picture become clear. Interest on PPF account is computed monthly on the minimum amount between the end of the fifth day and last day of a month. The total interest earned in a single year is added to the final amount at the end of the year.

Key points

When investors are investing in PPF periodically, the deposit date whether it is after 5th or before 5th will not hold much significance. If they are investing a lump sum amount in PPF account on a yearly basis, it is better to invest in PPF before 5th April. It will ensure that the account earns interest on substantial balance for April. The interest earned in a particular month largely relies on the rate applicable for that specific month. It is evident that when it comes to investing in PPF account, it is not as easy as it appears. There exist some minor lines, which if crossed can change the entire picture of PPF investment. In the case of any PPF related query feel free to write back to us. Overall if you are not investing your full PPF amount of 1.5 Lakhs per year you should be. Please do not look to any other investment options before investing your full PPF balance – the interest rate of 8%+ on PPF net of tax with zero risk is pretty much the best safe investment you can find. It’s significantly higher than debt returns and lesser than the potential of equity returns but the risk is even lower than bank FDs.

 

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