Source: The Economic Times
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| Diversifying one's savings in PPF and equities would serve the purpose of long term savings rather than relying entirely on any one of them. Diversifying one's savings in PPF and equities would serve the purpose of long term savings rather than relying entirely on any one of them. |
Even after several decades,
Public Provident Fund (PPF) Scheme,
1968 continues to be a favorite savings
avenue for several investors. After all, the principal and the interest
earned have a sovereign guarantee and the returns
are tax-free. The principal invested
qualifies for deduction
under Section 80C of the Income Tax Act, 1961 and the interest
earned is tax exempt under Section 10.
With interest
rates on taxable fixed income investments coming down, PPF remains a suitable alternative for allocating debt portion of one's investment
portfolio. Allocation to
equities through diversified equity mutual funds is equally
important, especially when the goals are at least seven years away. In 1968-69, PPF offered a 4 per cent per annum interest
(inflation was -1 per cent) and today it offers 8 per cent (inflation at 5 per cent), while from 1986-2000 it offered
12 per cent (inflation varied
between 3.3 and 13.7 per cent).
PPF is a 15-year
scheme, which can be extended
indefinitely in block of 5 years. It can be opened in a designated
post office or a bank branch. It can also be opened online with few banks. One is allowed to transfer a PPF account
from a post office to a bank or vice versa. A person
of any age can open a PPF account. Even those with an EPF account can open a PPF account.
One can deposit a maximum of 12 times in a year, but remember
to deposit before
the 5th of the month to get interest for the full month, as
the interest is allowed on the lowest
balance at the credit of an account from the close of the 5th day and the end of the month. Many investors deposit
a lump sum amount right at the beginning of the financial
year. There are provisions
to take loans and make partial withdrawals from the scheme as well. With the tax-saving season
on, many of us are looking to open a PPF account.
Here are a few things to consider
before opening one.
Effective interest
PPF is a
debt-oriented asset class, i.e., one's investment is not exposed to equities
and hence returns
are not linked to the stock market performance. The interest rate on PPF returns are set by government every quarter based on the yield (return)
of government securities. Currently, it offers 8 per cent interest per annum till March 31, 2017. As the interest
is tax-free, the effective
pre-tax yield for someone paying tax at 10.3 per cent, 20.6 per cent and 30.9 per cent rates will be 8.91 per cent, 10.07 per cent and 11.57 per cent per annum respectively.
Deposit limit
While the minimum annual amount required
to keep the account active is Rs 500, the maximum amount
that can be deposited in a financial
year is Rs 1.5 lakh. One can open a PPF account
in one's own name or on behalf of a minor of whom he is the guardian. This is the combined limit of self and minor account If
contributions are in excess of Rs 1.5 lakh in a year, the excess deposits
will be treated as irregular
and will neither
carry any interest
nor will this excess amount
be eligible for tax benefit
under Section 80C. This excess amount
will be refunded to the subscriber without
any interest.
PPF in the name of minor
A PPF account on behalf of a minor can be opened by either father or mother. Both the parents
cannot open a separate account
for the same minor. An individual
may, therefore, open one PPF account
on behalf of each minor of whom he is the guardian.
At times, grandparents are interested in opening PPF for their grandchildren. PPF rules however, do not allow them to do so, when the parents of the minor are alive. They can open the account
only if they are appointed
as legal guardian
after the death of the parents.
Number of accounts
An individual
can open only one account
in his name either in a post office or a bank and he has to declare this in the application form for opening the account.
Persons having a PPF account
in the bank cannot open another account
in the post office and vice-versa.
If two accounts are opened by the subscriber in his name by mistake,
the second account
will be treated as irregular
account and will not carry any interest
unless the two accounts are amalgamated. For this, one has to write to the Ministry of Finance (Department of Economic Affairs) and get its approval.
Premature closure
of PPF account
Unlike in the past, when only loans and partial withdrawals were allowed, now even premature
closure of the PPF account
is possible. It will, however, be allowed only after the account has completed five financial years and on specific grounds
such as treatment of serious ailment or life threatening disease of the account holder, spouse
or dependent children
or parents, on the production of supporting documents from the competent
medical authority.
If the amount is required
for higher education of the account
holder or the minor account
holder then, on production of documents and fee bills in confirmation of admission in a recognised
institute of higher education in India or abroad, premature closure of the PPF account
is allowed.
Nomination
The application form of PPF (Form-A) does not carry the provisions for nominations as it is to be filled in a separate
form. Make sure to fill the nomination form (Form-E) at the time of opening a PPF account to avoid any legal hassles
for the nominee later on.
Attachment
The PPF account and its balance
cannot be attached
by a court and hence the debtors
cannot access one's PPF account
to claim the dues, if any. However, it does
not apply to the income tax authorities and so the amount standing
to the credit of subscriber
in the PPF account is liable to attachment under any order of income tax authorities with respect to debt or liability incurred
by the subscriber.
Conclusion
PPF suits those investors who do not want volatility
in returns akin to equity asset class. However, for long-term
goals and especially
when the inflation-adjusted target amount is high, it is better to take equity exposure,
preferably through equity
mutual funds, including
ELSS tax saving funds. Comparing them, however, is not warranted as both are different
asset classes, with one currently
generating around 8 per cent returns as
compared to the other generating ( historical returns)
around 12 per cent return.
The latter, will anyhow
have a higher maturity corpus (with relatively
more volatility) than the former (with relatively
less volatility.) Diversifying one's savings in PPF and equities would serve the
purpose rather than relying entirely
on any one of them.
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