In another discussion on “Are You Organized for Investing”, we talked about opening a Public Provident Fund (PPF) account. PPF is open to all citizens without any age limit, meaning that both adults and minors can open it. 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. You may open a PPF account in addition to the General Provident Fund 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.
Number of PPF Accounts
As per rules all adults can open one account in their name. You can also open account for minors 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.
Limit to PPF 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. The system will either not accept any excess contribution, or it 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, i.e. 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.
Example
Consider a family of four- Mr & Mrs Sharma and their two minor kids Amar & Tara. The options for account opening and subscriptions are as under:-
(a) Mr Sharma has one account, and is guardian of two minor accounts of Aman & Tara. 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 Aman & Tara. 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 Amar. Mrs Sharma has one account and is guardian of Tara. Mr Sharma can contribute 1.5 lakh combined in his and Aman’s account. Mrs Sharma can contribute 1.5 lakh combined in her and Tara’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 Aman & Tara. Mr Sharma can contribute 1.5 lakh in his account. Mrs Sharma can contribute 1.5 lakh combined in her account and Aman’s & Tara’s account.
(d) When Aman & Tara 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.
Risk and Return in PPF Accounts
Risk. The government guarantees this scheme and therefore it carries zero risk.
Returns. The govt revises the interest rates periodically. The prevailing rate is 7.1%. Though the rates have been declining over time, at any given time the rate is always the best risk- free return with no tax liability.
Tax Benefits in PPF
PPF falls under the EEE category i.e., exemption at the time of investment limited to Rs 1.5 lakh; exemption on returns i.e. 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.
Legal Protection
Another good feature of the PPF is, that it has legal protection. This means that enforcement authorities can normally not attached it to any claim in case of debt or liability.
Benefit of Compounding in PPF
The investment in PPF may not sound very glamorous and attractive. However, over a period of time one would realize 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.
Maturity of PPF Accounts
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.
Options on Maturity
When the account matures after 15 years, there are three options as under:
Withdraw Entire Amount
You can close the account and withdraw the entire corpus.
Extend with Contribution
You can extend the maturity for another 5 years with annual contribution. And you can do this multiple times with no limit. However, one needs to be intimate this to the bank vide Form H, failing which the contributions after maturity will not get any interest. Subscriber has to exercise this option 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, you can make only one withdrawal in a financial year.
Extend Without Contribution
If you do not exercise any option, then this is the default option. However, one cannot contribute during this time. The account keeps receiving interest annually as per prevailing rates. You can withdraw any time in lumpsum or parts, but only once 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.
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.
Liquidity of PPF Account 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.
Common Oversights of PPF Subscribers
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. Regularizing it is a slightly tedious process, for which one has to apply to Ministry of Finance (DEA), NS Branch.
Recommendations
(a) Open one PPF account each for self, spouse and children. Not necessary that you subscribe the upper limit, i.e. 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.
If the account has become de-activated, or irregular due to oversight, take up necessary action for re-activation/regularization at the earliest.
You can read more about rules of PPF here.