PPF (Public Provident Fund)

Nisha: Hey, how was your weekend?

Rohan: Same routine, some work at the bank, one movie, one long drive and lunch & dinner at favourite places. How about you?

Nisha: I am bit lazy, you know. So I had my relaxed coffee break in the morning, watched some TV-series and that’s it. I believe you visit the bank at least once in a month. What do you do there? Looks like I am looking at a billionaire in the making..hmm?

Rohan: Haha..That’s the plan!! Actually, I visited this time to open a PPF account.

Nisha: Hmm..You MBA grads are nothing but a bunch of confusing guys. What is this PPF?

Rohan: That is so mean. Ok, let me try to explain PPF to you. See, whenever a person starts earning, he/she should start saving for the future. There are different financial products available in the market. Some are related to stock market, which are usually called equity-linked products and some are related to government bonds etc. which are called debt products.

It is advisable for one to have both Equity and Debt components in his/her investment portfolio. PPF is one good investment option in debt space.

Nisha: Ohh, so can we call it a Debt instrument?

Rohan: There you go. Looks like you have already started learning financial jargons.

Nisha: Awesome. But would PPF help me in saving taxes? Looks like I am paying a lot of tax these days.

Rohan: What? You already started paying taxes? I need a raise!!

Nisha: Hahaha..Ok now answer my question.

Rohan: Yes. The amount invested in PPF can be applied for deduction under Section 80C of the Income Tax Act, 1961. The interest earned on PPF is tax exempt as well.

Nisha: That’s great. So, I will invest this year, take the IT benefit and withdraw next year. Awesome.

Rohan: Wait..wait..once you invest in PPF, the amount gets locked-in for 15 years. This is called Maturity period.

Nisha: 15 years?? That’s too long.

Rohan: Well, you need to be patient to make good gains from your investments.

Nisha: So you invest your money and forget it for 15 years and you would have some good amount at the end, right?

Rohan: Yes, but you can be extend the period within one year of maturity for further 5 years and so on.

Nisha: I am fine with 15 years..you can extend it for yourself..already 15 years is too much for me.

Rohan: Haha, ok, whatever suits you.

Nisha: So one has to visit a Bank to open the account..

Rohan: Yes, but you can open it in Post Office as well and it can be transferred from Post to Bank and vice versa.

Nisha: That’s good. Do you have to visit the bank each time you want to deposit money in PPF?

Rohan: No, I can do that online once I open the account but I can deposit money in lump-sum or in max 12 instalments in a year.

Nisha: Ok. Can I open a joint PPF account with my sibling?

Rohan: No, that’s not allowed.

Nisha: See, I am still not comfortable with that 15 years thing. What if I want to close the PPF account midway?

Rohan: That is called premature closure in banking terms. It is possible. However, it is allowed only after the account has completed five financial years and on specific conditions such as treatment of serious ailment or life threatening disease of the account holder, spouse or dependent children or parents based on producing the supporting documents.

Nisha: Hmm. And if I don’t want to close the account but I need some money urgently. What should I do?

Rohan: See, prior withdrawal is permissible every year from 7th financial year from the year of opening account. The amount should not exceed 50 per cent of the balance at the end of the fourth preceding year or the year immediately preceding the year of the withdrawal, whichever is lower, less the amount of loan if any. Only one time withdrawal is permissible during one financial year.

Nisha: Loan? Can I take loan on PPF?

Rohan: Yes, loan facility is available from 3rd financial year.

Nisha: Ok. That’s good. You owe me some 50 rupees right? Give it to me; I will start PPF account this weekend.

Rohan: Ohh, you remember those 50 rupees..damn!! Ok I will give it but you can’t open PPF account with it. You need minimum 100 rupees for opening an account. Then, you need to deposit minimum 500 rupees per financial year and maximum 150000/- per financial year.

Nisha: Ok, but how much return would I get on this investment?

Rohan: The Ministry of Finance, Government of India announces the rate of interest for PPF account every quarter. The current interest rate effective from 1 January 2018 is 7.6% Per Annum which is compounded annually.

Nisha: Wait..wait..that’s some serious calculation you just told.

Rohan: Don’t worry, just google and you would find some good PPF calculators.

Nisha: I knew Information Technology is always better than Finance.

Rohan: Haha..

Nisha: I have some more questions. Who all can open the account?

Rohan: Anyone. You can open a PPF account in your own name or on behalf of a minor of whom you are the guardian.

Nisha: Ok. But this max limit of Rs. 150000 per year bothers me. Can I open multiple PPF accounts?

Rohan: Seriously?? How much money do you have?

Nisha: Lol..You would not get to know that Finance expert. Tell me the answer now.

Rohan: A person can open only one account in his/her name either in a post office or a bank and he/she has to declare this in the application form for opening the account. Persons having a PPF account in the bank cannot open another account in the post office and vice-versa.

Nisha: Damn!! Ok, how about the nomination?

Rohan: Application form of PPF account does not carry the provisions for nominations. You have to make sure to fill the nomination form (Form-E) at the time of opening a PPF account to avoid any legal hassles for the nominee.

Nisha: Ok, so let’s try to conclude something.

Rohan: See, PPF is EEE instrument. Each E stands for something.

First E - Investments each year can be claimed under 80C

Second E – Interest Earned each year is tax free

Third E – Maturity amount is tax free

I think we as Indians are prone to like instruments which give better returns in short span of time, therefore the 15 year lock-in period for PPF sounds bit intimidating. But such long term lock-in is good, because you would not touch this amount for 15 years and once it matures you would be able to use the lump sum amount for some big spending.

Nisha: Hmm..Good I will start investing in PPF to buy a good car down the line. Thank you! And don’t forget that 50 rupees you owe me.

Rohan: Haha..Let’s consider it as my fees for explaining all this to you. Now I need to go and meet my manager to ask for a raise!!

Nisha: Haha..All the best!!