New Delhi: Public provident scheme is a long-term investment instrument with the maturity period of 15 years. A lot of people prefer to invest in PPF as it is safe and offers guaranteed returns. The interest rate on PPF is compounded on an annual basis. Currently, PPF is offering 8% rate of return. It may be noted that PPF provides EEE tax benefits which means that PPF contribution, interest earn on PPF and PPF proceeds are exempted from tax.
Loan: Other than being a safe investment instrument which offers moderate returns, PPF also offers loan and partial withdrawal facility to the account holders. If you need money urgently, you can get by taking a loan on your PPF rather than selling your assets or mutual fund units. PPF currently offers personal loan at 9.6 per cent rate compared 11.3 per cent interest charged by the banks.
PPF account holders can avail a loan between the third and sixth financial year of opening the PPF account. The maximum amount of loan one can avail on their PPF account is of 25 per cent of the total amount in the account by the end of the second financial year preceding the year in which the loan was applied for.
This means that if you apply for a loan on PPF in April 2018 then the maximum loan amount you can get will be 25% of the amount in the account on April 2017. The interest charged on PPF loan is 2 per cent more than the interest earned on PPF which means since the current interest on PPF is 8%, you will get a loan on PPF at 10% interest rate.
Loan repayment: A person gets three years or 36 months time to repay the loan. For repayment, they will have 2 months to pay the interest amount once they repay the principal component of the loan. If the account holder fails to repay the loan within 3-years, the interest rate will be 6 per cent more than the prevailing interest rate.
Partial Withdrawal: After the completion of the sixth financial year or from the beginning of the seventh financial year, you will be eligible for partial withdrawal from your PPF account. You can make maximum one partial withdrawal in a year. The maximum partial withdrawal amount is capped at 50 per cent of the account balance at the end of the fourth financial year or 50 per cent of the account balance at the end of the previous financial year, whichever is lower.
Tax exemption: PPF contributions are eligible for tax deductions under Section 80C of the Income Tax Act. The deduction limit for PPF deposits is Rs 1.5 lakh. PPF accounts offer triple exemption benefits – deduction on deposits, tax-free returns and no wealth tax.
PPF account in minor’s name: One can open a PPF account in their minor child’s name but they cannot deposit Rs 1.5 lakh in that account like the regular PPF account. As per PPF rules, “Any individual may, on his behalf or on behalf of a minor, of whom he is the guardian, subscribe to the Public Provident Fund any amount not less than Rs 500 and not more than Rs 1.5 lakh in a year.” What most people do not know is that fact the even though a person has two different accounts, the combined contribution in both cannot be more than Rs 1.5 lakh in a year.
PPF extension: A PPF account can be extended by a block of 5 years at a time. There is no limit as to how many times a PPF account can be extended even though some banks tell customers that PPF can be extended only twice. If you choose to close your PPF account, you can withdraw the amount in instalments but you cannot choose this option for more than a year. PPF account can be extended for 5 years within 1 year of maturity with or without any further contributions.