Public Provident Fund (P.P.F.) - A powerful investment tool

The Public Provident Fund (P.P.F.) has been established by the central government. It is a long-term investment option that would be suitable for all kinds of investors. Every indian citizen can open P.P.F. account. Regular and systematic practice of saving money is the key to wealth creation in the long-term.

Here are the Top 10 facts about P.P.F to make yourself more profitable in the long-run. Continue reading the details of P.P.F. account tips and gain advantage out of it.

1. Opening of P.P.F. Account

Salaried, Self-employed or Business People, Individuals can open a P.P.F. Account. P.P.F. Account can be opened either at any of the Nationalised Banks or at Post Office. Since P.P.F is backed by the central government, it is safe & secure. You are not allowed to open multiple P.P.F. accounts on your name. If found, more than one account, second account will be closed immediately and only the principal is being returned, but, the interest earned on the principal is not returned.

2. Filling up the Form

You can get the P.P.F. Account opening form at any of the nationalized banks (You donn't need a savings account with that bank) or post office. Along with the application form, You need to attatch one Photograph, copy of the Permanent Account Number (PAN), in case of unavailability of PAN number, You need to submit the copy of the Ration card, voter id card or passport. You will be provided

with a passbook (similar to bank pass book), to record all the future contributions made into P.P.F. account, interest earned and withdrawals, loans are etc.

Nomination to any investment is very important part. Similarly, While opening a P.P.F. account, Ensure that you appointed a nominee. You're also allowed to change the nomination at any time thereafter. You can nominate more than one individuals.

3. Rate of Interest

P.P.F. Offers 8.6% (applicable from 1-Dec-2011) rate of interest per year. (The interest rates may vary a little from time to time).

It is very interesting fact out of all listed here. P.P.F. calculates the interest on your contribution, considering the lowest balance between fifth and last day of the month. So, for maximum returns on your contributions, you need to deposit on or before fifth of every month. It is good habit to deposit on the day of receiving your salary, so that you won't miss the date in the last
minute.

4. Making Contributions to P.P.F. Account

Another attractive features of Public Provident Fund (P.P.F.) is the flexibility to make the contributions across the year. Unlike other investment tools, you need not to invest in a lumpsum.

Unlike Recurring deposits, Mutual fund SIP's, your contributions need not be same, You may contribute 10,000 on January, 5,000 on February, 8,000 on March, 4000 on April etc.. But the one limitation is the number of contributions in any financial year are only twelve.

P.P.F. requires a minimum investment of Rs. 500 and maximum investment of 1,00,000 per year (Maximum limit increased from Rs. 70,000 to Rs. 1,00,000 by Government from 1-Dec-2011). Individuals may also open a P.P.F. account on behalf of their minor child. You don't need to deposit all the money in one installment, You can deposit in 12 easy installments.

From the point 3, Make a habit of depositing the money on or before fifth of every month, if you choose monthly contributions.

5. P.P.F. Offers Multiple tax benefits

Contributions towards P.P.F. Account are eligible for tax exemption upto Rs. 1,00,000 per year u/s 80C from 2011-12 F.Y. Besides this exemption, the maturity amount and the interest earned on these total contributions made till maturity is also tax free. Contribution towards minor child's P.P.F. accouont can be considered for tax exemption of parent u/s 80C. Contribution towards major children or spouse cannot be eligible for tax exemption.

Note: Let's say you open one account on your name and another account on your minor child name and deposited Rs 1,00,000 in each account. You may think that the tax exemption is doubled, i.e. Rs, 1,00,000 from your account and 1,00,000 in your child's account. You will be eligible for maximum of Rs. 1,00,000 per year u/s 80C.

How P.P.F. acts as a tool for children future plans?
When you opt for a children insurance plans, majority of your premiums go to risk coverage and the returns are obviously less compares to P.P.F.. P.P.F. is being chosen by wide range of parents for their childrens bright future to take care of the all the future needs, bacause of its safety and guaranteed returns over the peiod of time.

6. Validity of P.P.F. Account

P.P.F. Account is valid for 15 years duration. Let's say, If you open a P.P.F. account in 2011-12 (current financial year), You can withdraw it only after 15 years, i.e Your account, matures on 1-Apr-2027. Entire balance can be withdrawn on maturity.

You will be given two options on Maturity, First, You can withdraw all your money, close the account and re-open a new account if required. Second, You can extend the account for next 5 years period (only one extension allowed) and you can make your contributions as usual. After the completion of the 7 years, You can withdraw 50% of the account balance, if needed.

In case of death, P.P.F. account will be closed there and then without waiting till maturity. Amount will be settled to the nominees.

7. Loan from P.P.F.

Account holder is eligible for a loan on the P.P.F. from the third year to the sixth year. The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year(of opening of the Account). You can make withdrawals during any one year from the sixth year. Rate of interest charged on such loan will be 2% more than that of the P.P.F. interest rate at that time.

8. After Maturity

Ofcourse, the P.P.F. validity is of 15 years, Account holders can either close the account or extend the account for a block of 5 years. Let's see how will it works?
a) Close the account and withdraw the entire amount. You can again open a new account and re-invest the withdrawn amount in it and get the tax exemption for that year.
b) Extend the P.P.F. account without making any further contribution and earn the same rate of interest like earlier. In this case, If needed, you can withdraw the entire P.P.F. amount either in a lumpsum or in installments. But, you're not allowed more than one withdrawal in a financial year.
c) Extend the P.P.F. account with fresh subscription. In this case, (i.e., extending the P.P.F. account while continuing with fresh deposits), then you can withdraw upto 60% of the account balance (at the beginning of the extended period) during the next five years.

9. Ensure P.P.F. account is active

P.P.F. Account become -in-active' when you miss contributions to it. So, keeep contributing to it. You are not allowed for any loan facility or partial withdrawals in case, if the account is in 'in-active' status. However, with a prescribed fee, you can regularize or revive the discontinued P.P.F. account along with subscription arrears (i.e. a minimum of Rs 500 for each such default year).

10. Closing of the Account

Interest will not be calculated for the month in which the account is being closed. So, Consider closing the account a the beginning of the month. Atleast one year before the closing of the P.P.F. account, plan properly to utilize the corpus fund for better gains.

You can try calculating the PPF Returns after 15 years using the calculator attatched at the bottom of this article. After downloading the attathment, You need to give your age, approximate amount to be contributed every year, and the rate of interest on PPF (Currently PPF offers 8.6% per year)

Conclusion:

Do consider opening a P.P.F. account, You can start accumulating as little as Rs 500 a year to keep it going. Happy investing !!!!