For most of the salaried persons, the Public Provident Fund (PPF) is only about mandatory deductions done by the accounts department of their employer-company. Some others treat the PPF as a tax saving instrument.
But given the rate of return on various bank accounts, savings and insurance schemes, the PPF could be a very lucrative investment tool. And, even a non-salaried person like a shopkeeper, a small entrepreneur or a daily wage earner can open her PPF account.
PPF accounts can be opened with all the nationalised banks and some of the private banks including ICICI Bank and Axis Bank.
The original design of the PPF is to ensure that the contributor has adequate fund at her disposal in old age. To encourage people to save for their old age, and thereby reducing the social security burden on itself, the government provides a range of incentives for a PPF investment.
The incentives include tax deduction, higher rate of interest and security of the investment made in the PPF.
What is the rate of interest on PPF?
The current rate of interest on PPF investment is 8 per cent per year. The government revised rate of interest on PPF recently. The new rate of interest on PPF came into effect on October 1.
Most of other investment instruments offer an interest rate of much lower than the PPF. In this sense, a PPF investment becomes an handy source of income for future.
As per the revised rate of interest on PPF, if an investor is in the 30 per cnet, she would get a 10.4 per cent annual return.
An account holder can make maximum 12 annual contributions – one for each month. Minimum one contribution is required to keep PPF active.
The PPF investments are tax-free up to Rs 1,50,000 a year. The interest earned by the contributor at the end of maturity period is also tax-free.
How much can be invested in PPF?
Opening of a PPF account is very simple and follows a process similar to a bank account. The contributor has to furnish an identity proof and another proof of address.
The proof of identity and address should have been issued by a government agency in case of a non-salaried person. For salaried, the employer’s credentials are enough. A photograph is also required for opening a PPF account.
The minimum investment at PPF is Rs 500 a year. The government fixes the upper limit of contribution towards PPF. The current limit is Rs 1,50,000 a year. This contribution or investment is tax-free.
Is there any lock-in period?
Yes, the primary lock-in period for PPF accounts is 15 years. This has been done to ensure that economically vulnerable workers get respectable money when they start aging.
Partial withdrawal is allowed after seven years. Up to 50 per cent of investment made in the PPF can be withdrawn.
Further, loan can be availed against the PPF contribution from the fourth year. Up to 25 per cent of the investment can be taken as loan. The rate interest on loan is just two per cent if repayment is done within three years, exceeding which it rises to six per cent.