Interest rate is assured but not fixed
The interest rate of the PPF is not fixed but linked to the 10-year government bond yield. The rate doesn’t change on a day-to-day basis but is fixed at the beginning of a quarter based on the average bond yield in the previous three months. Bond yields have risen in the past three months so logically rates should also go up. But rates of small savings schemes were already higher than what the formula prescribed. So, don’t expect any upward revision in the PPF rate even though bond yields may breach the 7.5% mark. That the rates have not been cut itself is a relief of millions of investors.
Lock-in is not 15 years
The PPF is a long-term investment with a tenure of 15 years. But this does not mean your money gets locked up for that long. The 15-year term is from the day of opening the account. With every year, the lock-in period progressively reduces. In the 14th year, it is only one year. So, a PPF account opened in April 2008 will mature in April 2023. Contributions to the account in April 2022 will have a lock-in period of only 12 months. Since partial withdrawals are allowed after the sixth year, some investors even treat the PPF as an emergency fund.
Tenure can be extended
When the account matures, the subscriber can withdraw the entire corpus. But the account can also be extended indefinitely in blocks of five years. This extension can be with or without contributions. To extend the account with contributions, the subscriber must write to the Post Office or bank within one year of maturity that he wants to continue investing in the PPF account. If he does not inform the bank or Post Office, the account will automatically be extended but will not accept further contributions. The balance will earn the normal interest and investor can make one withdrawal in a year.
Partial withdrawals allowed
PPF allows investors to make partial withdrawals in case of an emergency. After the sixth year, an investor can withdraw up to 50% of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower. If the account has been extended without additional contribution, the subscriber can withdraw any amount from the account. But if the account has been extended with additional contribution, the withdrawal limit is 60% of the account balance at the start of the extension period.
Take a cheap loan from PPF
One can also take a loan from the PPF between the third and sixth years. The loan is capped at 25% of the balance at the end of the previous year. The interest rate on the loan is 1% higher than the prevailing PPF rate. Based on the current PPF rate of 7.1%, the loan against PPF will charge 8.1% interest. This can change if the PPF rate changes. However, once the loan is disbursed, the interest rate gets locked till the end of the repayment period. The PPF loan is for 36 months. If the borrower is not able to repay within this period, the interest on the loan gets bumped up to 6% above the PPF rate.
Mind the minimum and maximum investment
You must contribute at least Rs 500 and at most Rs 1.5 lakh in your PPF account in a financial year. The minimum investment of Rs 500 has to be maintained even for accounts extended beyond 15 years. If you don’t put in minimum Rs 500 a year, the account becomes dormant. There is a Rs 50 penalty for reactivating a dormant account. If you put in more than Rs 1.5 lakh in a year, the excess amount, even if credited by mistake, will not earn interest. The maximum limit of Rs 1.5 lakh per year includes the contribution in PPF accounts in the names of minor children.
Invest by 5th of month
The PPF interest is compounded annually but the calculation is done every month. The interest is on the lowest balance between the 5th and last day of every month. If you invest before the 5th, the contribution will earn interest for that month too. Otherwise, it’s like an interest-free loan to the government for a month. If you are investing through a cheque, make sure you deposit it at least 3-4 days before the cut-off date. If your bank is slow in crediting the amount or there are holidays in between, your investment might miss the deadline and lose one month’s interest.
Account can be foreclosed
An investor can even close his PPF account prematurely if he needs money for higher studies, medical treatment of self or family or if his residency status has changed. But this can be done only if the account has completed five years. There is also a penalty for foreclosure. The balance will fetch 1% lower interest than the PPF rate. This 1% penalty might seem small but will apply for the entire tenure of the account. If you earned 8% interest on the PPF account for the past 12 years, the interest will be recalculated at the reduced rate of 7%. So, go for this option only if there is a real emergency.
PPF is loaded with tax benefits
The PPF is loaded with tax benefits. Contributions to the PPF are eligible for tax deduction within the overall ceiling of Rs 1.5 lakh under Sec 80C. While the interest earned on the PPF is not taxable, it has to be reported in the tax return filed by the individual. Withdrawals are tax free too and do not affect tax liability of the individual. However, as per a new rule introduced in 2020, withdrawals of over Rs 20 lakh from PPF can be slapped with TDS of 2-5% if the individual has not filed tax return in the past three years.
Additional tax benefits
There are other tax benefits of the PPF. As per the current tax laws, if money gifted to a spouse is invested, the income from the investment will be clubbed with that of the giver and taxed accordingly. Since PPF income is tax free, it does not increase the tax liability of the giver even if clubbed with his income. So, by opening an account in the name of his wife, one can invest an additional Rs 1.5 lakh a year in this tax-free haven.
(Mukesh Kalra is founder & CEO of ETMONEY. ETMONEY is a Times Internet company, publisher of the website, economictimes.com)