PPF – Is it still a good bet after small-savings rate cut?

Experts say that despite the rate cuts, individuals should continue investing in PPF as a tax-free retirement corpus is built

The Various Features of PPF are as follows:

Any Resident Indian Citizen can open a PPF account.

• An individual an open a PPF account with the any of the nationalized banks, post offices, or any other private bank like ICICI, Axis Bank, etc
• The Lock in period of a PPF account is 15 years. This tenure can be further extended any number of times in a block of minimum 5 years
• In a particular financial year, an investor should make a minimum deposit of Rs. 500 and can make a maximum deposit of Rs. 1,50,000 in the PPF account
• For the entire amount invested in PPF, deduction can be claimed U/s 80C
• Balance in the PPF account earns interest from Government but the Interest earned in the through the PPF account is reinvested and can only be redeemed after the maturity date. Also, the Interest received is Tax Free
• Partial withdrawal of the Amount in PPF is allowed from the 7th year onwards, though a maximum of 50% of the previous year’s balance only can be withdrawn
• After completion of three years, loans against the PPF balance can be availed but maximum of up to 25% of the balance amount can be availed as loan amount
• The entire corpus received at the time of maturity is fully tax-free.
• PPF works on Tax year or financial year basis, i.e., April 1st – March 31st. The interest rates frequently changes and right now it’s 8.1% p.a.

Interest Rate Changes

From 1st April 2016, the Public Provident Fund (PPF) will yield 8.1% p.a. as compared to 8.7% p.a. earlier. The interest rates on small savings have been drastically slashed by the government in order to align them with market rates. Sukanya Samriddhi Account (exclusive investment option on behalf of a female child) will now fetch an interest rate of 8.6% p.a. as against 9.2% p.a. earlier.

Changes in Investment pattern

Due to the interest rate cuts, investors of small savings schemes may need to realign their portfolio now and look for investment options which fetch higher returns that are tax-free.

What the experts say?

Banks have argued, that despite successive rate cut by the Reserve Bank of India, higher rates offered on small savings schemes like PPF made it tougher for the banks to lower their deposit rates, which has eventually delayed monetary policy transmission.

Analysts say that despite the rate cuts, individuals should continue investing in PPF as a tax-free retirement corpus is built. PPF is ideally meant for self employed and professionals, those who do not plan their retirement like the salaried class who regularly contribute to the Employees’ Provident Fund through their employer.

PPF is the most preferred investment option for individuals, as it is fully tax-exempt at any stage. A PPF subscriber can open another account in the name of a minor (child), but the combined maximum investment limit can only be Rs. 1.5 lakhs p.a on adding balance in all the accounts. A PPF account matures only after 15 years and can be renewed in a block 5 years thereafter. Non-residents cannot are not allowed to open a new account, but can continue investing in their existing accounts till its maturity but extension after 15 years is not possible.

Sukanya Samriddhi Account

Similar to PPF account, Sukanya Samriddhi Account (SSA) enables parents of girl children to build a sizable corpus towards her education or marriage expenses. A minimum amount of Rs. 1,000 should be deposited to open this SSA account. The guardian can then deposit any amount in multiples of Rs. 100 to continue investing. Like PPF the upper deposit limit here is Rs. 1.5 lakhs p.a. An individual who invests in SSA, like PPF, will get tax deduction on the investment made every year and the returns generated will be fully tax-free. Unlike PPF, Sukanya Samriddhi Account will fetch a higher interest rate of 8.6% p.a as against the normal PPF account of 8.1% p.a.

Frequently asked questions (FAQs)

1. What is the maximum, minimum Investment Amounts in PPF

• A minimum deposit of Rs. 500 per year should be deposited in a PPF account.
• Maximum amount of Rs. 1,50,000 p.a can be deposited
• You can deposit different mount in each installment. For example, in the month of April you may deposit Rs. 10,000 but in the month of August you shall deposit Rs.500. You may also skip some months without any deposits
• Similarly, the total amount deposited in each FY can also be different. For example, in FY 15-16 you may have deposited Rs 50,000 but in FY 16-17 you shall deposit Rs. 30,000 only
• Amounts can be deposited through a number of mediums like online, cheque, cash, or via demand draft.

2. What happens if I skip a deposit during a year?

If the minimum amount is not deposited during a financial year, the account becomes discontinued. However, Interest would continue to accrue. You could again regularize the account by paying a penalty fee of Rs 50 for each year when the minimum amount was not deposited along with arrears amounts of Rs 500 per skipped financial Year.

For example, if you have paid Rs. 400 in year 1 and Rs. 10,000 in year 2 and no amount was deposited in the third year, you would be required to pay penalty fees of Rs. 50 per year when the minimum amount was not deposited. In this example, you should pay Rs. 100 as fees (50 for 1st year as the amount deposited is less than Rs.400), 50 for 3rd year as there was no investment). In addition to this, you have to deposit Rs. 100 and Rs. 500 as arrears for the years 1 & 3 as the amount deposited is less than Rs. 500.

3. What is the minimum duration of PPF investment?

The minimum duration for the investment is 15 years (lock-in period).  The account holder has the flexibility to extend the PPF account in a block of 5 years for any period after the lapse of minimum duration. The account holder can also retain the account for any period after maturity without making any deposits. The balance amount will continue to earn interest at the prevailing rate till the account holder closes the account. As PPF works on financial year basis, interest is credited at the end of financial year (March 31st).

4. How interest is calculated?

Since, the PPF works on the FY basis (April 1st – March 31st), the interest is paid only at the end of the financial year (March (currently 8.1% p.a.). Monthly Interest is calculated on the minimum balance between the end of the 5th day & the last day of the month, however, the total interest due for the year is added to the PPF account only at the end of FY.

6. Can I avail loan from my PPF account?

• After completion of three years, loan against the PPF balance can be availed but only 25% of the balance amount can be availed as loan amount
• The maximum repayment period is 36 months
• PPF Loan Interest payable on is 2% p.a more than interest received by the investor. If the loan is not paid back on time, the interest charged is 6% p.a more than interest received by the investor
• A second loan against your PPF balance is available before the end of the sixth financial year, but the first loan should have been settled before availing the second loan

7. How much corpus one can build investing in PPF?

PPF is a long term investment instrument and utilizes the Power of Compounding (more the number of years you invest, the more the returns). If an investor deposits Rs 1.5 lakhs before 5th April of every year in PPF, say, after 15 years his fund will be as much as Rs. 44.37 Lakhs assuming the prevailing interest rate (8.1%) throughout the tenure. An illustration is shown below: