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Friday, February 24, 2012

Year End Tax planning part-4

What is PPF?

PPF or Public Provident Fund is a tax-saving  avenue which allows  individuals and HUFs to park up to Rs. 1,00,000 (earlier 70,000) in a financial year to claim tax benefits  under section 80 C of the Indian IT act.

Who can invest in it?

Any resident individual or HUF can open PPF account. NRIs are not eligible for PPF account.
However, if a resident who becomes an NRI during the tenure of the already existing PPF account is allowed to continue his account till maturity.

Why PPF?

Apart from investors who wish to save taxes, PPF is also availed by investors whose income fall below taxable limit and the answer lies in the security and ease provided by the PPF. A PPF account can be opened and continued with a minimum amount of Rs. 500 per financial year so even a person falling in lower income category may also contribute to PPF.
PPF is government backed systematic and disciplined way of corpus building over a long period of time and unlike other financial instruments, in case of bankruptcy a lender can’t claim your PPF money.

Interest Calculation

Interest on PPF accounts is determined by the government and varies as per government’s instruction from time to time.
Presently your PPF account shall fetch you 8.8 % (8.6% earlier) interest per annum. Interest is calculated on the monthly basis but added to the corpus at the end of the financial year that is 31st March. Interest is payable on minimum available balance  between 5th of a month and the month-end. So compounding benefits are there in PPF but compounding is done yearly.

Where to open a PPF account?

PPF account can be opened in post offices, designated branches of the SBI and its subsidiary banks and with designated branches of other few banks like BOB, IDBI etc.

Contribution into PPF

In a financial year investors can contribute lump sum amount or in installments but only 12 installments are permissible in a financial year and sum of the all installments should not exceed Rs. 1,00,000 in a particular financial year.

Tenure and withdrawal option

Tenure of PPF is 15 years. This means a PPF account matures after the completion of 15 years.
So an account opened on March 31, 2012 shall mature on 1st April 2017.But partial withdrawal is allowed after the completion of 5 years.
Withdrawal amount is the 50 % of the accumulated corpus in 5th or preceding year whichever is lower. If one wishes one can continue the PPF account for further 5 years after the maturity 15  years.


Presently a contribution up to Rs. 1,00,000 is deducted from the taxable amount under section 80 c of the Indian IT act. Apart from this present EEE (Exempt Exempt Exempt )regime the final corpus (contribution+ interest) at the maturity is tax exempt that means no tax is payable on the corpus (final amount received from the PPF account).
But with the inception of the DTC (Direct Tax Code) government is mulling to shift the regime to EET (Exempt Exempt Tax) so investors shall be liable to pay tax on the maturity amount.
DTC was supposed to be be implemented from April 1st 2012 so government but it seems impossible and it is sure to be delayed.  EEE regime shall be applicable to those who have opened PPF accounts prior to 1st April 2012 or formal announcement date of DTC implementation.
But one thing is for sure that those who shall open PPF account (or already having a PPF account) before 1st April 2012 shall not be taxed on maturity amount receivable from PPF maturity which falls after the completion of 15 years from the date of opening PPF account.
Another thing which  is sure that investors shall continue to get benefits under section 80 C even under DTC.

Loan on the PPF account

One can avail loan on his PPF account form 3rd year to 6th year of the tenure. As one can avail withdrawal facility from 6th year (completion of 5 years) loan facility is not available after 6th year of the tenure. Maximum Loan amount is 25 % of the accumulated corpus (balance in the account ) at the end of first year

Salient Features of PPF Account
       (1)    Only one account can be opened in a single name. If one opens more than one account then other accounts are closed and principal is returned without interest.

      (2)    Joint accounts are not allowed but you can give more than one nominee names.

      (3)    In case of the death of the account holder nominee can’t continue with the account. Account is closed and settlement amount is handed over to the nominee. In case of absence of nominee settlement amount goes to the legal heirs.

Procedure of opening a PPF account

To open a PPF account one has to visit the designated bank branch with PAN number, ID proof  and the address proof. After the formalities a passbook is issued to the account holder. Many banks allow you to contribute in PPF account through online banking option.


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