Here are the 10 practical tips on how to invest in PPF:
Account Opening
1) First, you should open a PPF account even if it’s not on your investment radar .
Furthermore, leave aside section 80C tax-break/tax-planning, otherwise also PPF is among the best debt option available to you – particularly self-employed persons who don’t contribute to EPF – for retirement planning because it offers tax-free returns (current interest rate is 8% which translates into pre-tax yield of 12.12% for someone in the 33.99% tax bracket), exemption from wealth tax and the protection from attachment by any order or decree of court.
2) PPF also allows you to open an account in the name of your spouse or children. Children can be major or minor, son or daughter, bachelor or married, dependent or otherwise. The only restriction is that total aggregate contribution in all the accounts should not exceed Rs 70,000 in a financial year (i.e. 1st April to 31st March).
If you decide to open an account in the name of your spouse or minor child, what are the tax implications? The contribution will be deemed as gift and clubbing provisions under section 64 should apply. But as the interest is exempt, there’s no income to be clubbed; therefore, nothing to worry about. On maturity, if you reinvest the amount somewhere else, the clubbing provisions becomes applicable in both the cases: spouse and minor child. However, if by the time of maturity, child has become major, the clubbing provision under section 64 (1A) becomes inoperative (i.e., there won’t be any clubbing of income).
So, if you want to make investment in the name of your minor child, PPF is a preferred instrument to avoid the clubbing provisions of IT Act .
3) While opening an account, please don’t forget to appoint a nominee . In fact this is a very important part of making any investment or buying life insurance. You’re also allowed to change the nomination at any time thereafter.
Making Contributions
4) One of the attractive features of PPF is the flexibility offered to you for making contributions. Unlike NSC, you need not invest a lump sum amount at one go. PPF gives you full discretion to invest in installments within the range of minimum amount of Rs 500 and maximum amount of Rs 70,000. Besides, unlike recurring deposits or mutual fund SIPs each installment need not be same. You can vary the amount of deposit as per your convenience. Also, you can deposit more than one installment in a month. The only limitation is that the total number of installments in a year should not exceed twelve.
Thus , rather than waiting for the end of the year to deposit the one lump sum amount, keep on investing small sums on regular basis .
5) Make sure that you invest by the 5th of every month . Why? Because, in case of PPF accounts, interest is calculated on the lowest balance between the close of the fifth day and end of the month (though credited to your account on annual basis).
6) Keep on investing. Never think of making premature withdrawals . Nevertheless, if ever you face a financial crunch, you can avail the facility of loan (from 3rd year to 6th year) and partial withdrawal (from 7th year onwards). However, both the facilities are subject to certain ceiling limits.
Furthermore, there’s another possibility that you’re not able to make tax-saving investments for availing the deduction under section 80C due to some temporary cash flow problem (although your financial position is ok). In such a case also you just need to rotate the funds by making a partial withdrawal and redepositing the amount in your account.
7) Ensure that you continue to make a minimum deposit of Rs. 500 every year to keep the account active. Otherwise, it becomes ‘inactive’ account and you become ineligible for loan as well as partial withdrawal. However, you can regularize or revive the discontinued account after paying the prescribed default fee along with subscription arrears (i.e. a minimum of Rs 500 for each such year).
8) Though the term of PPF account is 15 years, the contribution made in 16th year (even on the last day) also qualifies for section 80C tax benefit . How? Because the PPF account can be closed only after the 15 years from the end of the financial year in which it is opened. In other words, it runs for full 15 financial years subsequent to opening of its accounts, and matures on 1st April of the 17th year. In other words, if you make a contribution to your PPF account on 31st March of the 16th year, and withdraw it on the next day (i.e., 1st April of the 17th year), you’ll be allowed a deduction under section 80C.
Account Maturity
9) On maturity, you can still continue with your PPF account, if you so desire. PPF gives you option to extend the account beyond maturity, each time for another block of 5 years. Put another way, you have three options available to you:
a) Close the account and withdraw the entire amount.
b) Continue the account without making any further contribution and earn the same rate of interest as before the maturity. If you choose this option, you can withdraw the entire amount either in a lump sum or in installments. However, you’re not allowed more than one withdrawal in a financial year.
c) Continue the account with fresh subscription . Please remember that for exercising this option, you’ve to submit form H within a period of one year of maturity. Besides, also note that if you choose this option, (i.e., extending the account while continuing with fresh deposits), then you’ve access to only 60% of the account balance (at the beginning of the extended period) during the next five years (i.e., 40% gets permanently blocked for another 5 years and you can’t
withdraw it even in an emergency).
In other words, though you’ll continue to be eligible for section 80C deduction on fresh contributions, it will adversely affect the liquidity.
How to decide whether to close the account or continue with it? The decision depends upon the facts and circumstances prevailing at the time of maturity such as your need for funds (immediate or in the near future), interest rate and availability of other investment opportunities.
10) When closing the account and withdrawing the amount, make sure you do it at the beginning of a month because you are not allowed any interest for the month of withdrawal.
