Ideal Investment is an open ended terminology. If we are asked to define it, then there will be many answer to this. It is because every individual has their own opinion which is influenced by their income group, risk appetite, their financial priority, goals etc. For example if I ask my father about his ideal investment then he would say that investment which gives him assured returns with as minimum risk as possible. Well he would not be interested much with taxation part as he is an NRI. So it differs from people to people.
If we compare a person who is 25 years of age and recently started earning with an individual who is 40 year old then the younger person would have higher risk tolerance level as compared to the older person. So the ideal investment for 25 year old person would be higher returns (thus higher risk), tax benefit and for 40 year old would be assured returns, moderate or minimum risk and tax benefit. What we have observed here is that, there is one common aspect for ideal investment between them and that is Taxation. Tax is such a thing from which if we turn our back then we are irresponsible citizen and if we adhere to it then it makes us responsible but hit our pockets and hence savings. So the ideal investment narrows down itself to one common aspect and that is Tax Management. A risk lover person can do it by investing in equity (Stocks, Equity oriented Mutual fund) but when we come to risk averse person he will go for debt instruments like Bonds, Debentures, Debt Mutual Funds, Public Provident Fund (PPF) etc. Out of all these instruments one instrument is very famous and popular and I would say that it is a tax haven instrument for risk averse and as well as risk taker people and that is Public Provident Fund Account.
Public Provident fund scheme was launched in year 1968 by National Savings Institute of the Ministry of Finance. By being a public provident fund it is evident that it is being made to increase the small savings of the individual which will be used for his/her future benefit (Retirement Purpose, Child Education, Marriage, Building house etc.) by earning good returns on the investment and which is guaranteed by Government of India. This scheme is mainly focused to provide a secured platform to the small as well as middle income group individuals. However, due to taxation benefit it is a popular investment among individuals from different income and age group.
Reasons for its Eminence is that any individual who is 18 or above in age and is an Indian citizen is eligible to open this account with minimum of Rs.500. The maximum contribution allowed in this account is Rs.150000 in a financial year, which can be made in lump sum or in 12 instalments. Accounts in the name of minor can also be open by the legal guardian but the contribution of maximum Rs.150000 will be counted collectively with contribution of guardian on behalf of minor.
Let’s say that Mr A has a PPF account on his name and he opens another account in the name of his son who is a minor. Mr A contributes Rs.50000 in a year in his account and Rs.75000 in his son’s account then for taxation purpose his investment will be counted collectively i.e. Rs.150000.
To open this account you just have to take following documents with you:
- Valid ID and Address proof (Passport, Pan Card, Aadhar Card, Driving License etc.)
- Passport sized photographs.
Please note that neither multiple accounts can be opened by a single person at a time nor the account can be transferred from person to person.. You can go to your nearest post office or commercial bank and get your account open. The payment can be made by cash, cheque or through online mode. In case if you do payment by cheque then, the realisation date (the date at which the amount is received by bank or post office) will be considered for opening of your account. If a person wants then he or she can easily transfer his or her account from one bank or post office to another without any charges.
PPF is a provision which is a long term programme and thus the maturity period is of 15 years with 8% p.a. compounded annually rate of interest. You can always choose the nominee for your account and change that even after the account has been opened. Though the interest rate fluctuates every quarter with government’s policy but it remains in 8% bracket. To calculate the year of maturity of PPF account the financial year of opening of the account is not considered. If a person wants then he/she can extend his/her account for the block of 5 years within one year to its maturity. Extension can be made with or without further contribution.
Let’s say that you have opened your account in August 2015 then the period of maturity i.e. 15 years will be calculate by excluding year 2015-16 and thus your account maturity year and date will be 31st march 2031.
The rate of interest will be calculated on the balance standing in the account between 5th of every month and last day of every month whichever is lower and it will be paid on 31st March of every year. So it is advisable that you should deposit your money in first 5 days of the month so that you will get the interest for that amount and thus earn a little extra.
PPF comes under EEE tax regime which means that the principal amount, interest and maturity all will be exempted from the purview of Income Tax. For an instance if a person contributes Rs.12500 monthly in his PPF account for 15 years then at 8% rate of interest he will get Rs.4247231 which is tax free. Hence Rs.12500 is eligible for deduction as it makes Rs.150000 per year under Section 80C of Income Tax Act and the interest income which he has earned for a year is Rs.6424 is again tax free (total Rs.1997231 for 15 years). The present limit of Rs.150000 may be increased by the government in the coming years.
Since this account is made for the long term saving purpose by the government, it indirectly helps in government funding for its projects meant for social development and welfare, therefore this account comes with an lock in period of 15 years but, partial withdrawal and loan facility can be availed subject to certain condition which are:
In condition for partial withdrawal an individual is allowed to partially withdraw the amount from the PPF account from 7th year onwards or after the end of 6th year excluding the year of opening of the account. Such amount can be withdrawn only once in a year. The permissible amount will be lower of
- 50% of the amount at the end of 4th year preceding the year of withdrawal i.e. 7th year
- 50% of the amount at the end of immediate preceding year of withdrawal.
Condition for Loan
The loan amount is available from this account only between the 3rd to 5th year from the date of opening of account. Between this period the maximum loan that can be availed is 25% of the amount standing at the end of 2nd year immediately preceding the year in which the loan is availed. If the loan is repaid within 36 months then and only then the second loan would be available. For further details you can always contact your financial planner.
Since this account is made for our own benefit and financial security so it is expected from us that we contribute sincerely to this account without defaulting. However, we cannot be certain in life and if in case of any default in payment, the account remains inactive for the number of years for which the contribution has not been done. For the revival of account a penalty of Rs.50 for the total year of default and the minimum contribution that should have been made i.e. Rs.500 for the defaulted period as well as for the period in which we are reviving our account should be paid as penalty.
For example, if Mr X has defaulted for 3 years in making payment then in he has to pay Rs.50 for 3 years i.e. Rs.150 and minimum contribution that should have been made i.e. 500 for 3 years which is Rs.1500 and the 500 in which he is reviving his account. So total penalty will be Rs.2150 (150+1500+500). Therefore it is advisable that you should avoid it.
We all want to save for our future and what would be best then having such a great option to do so. Public Provident Fund not only help us in realizing our crucial financial goal but it also helps us in minimizing our tax burden thus making us a responsible citizen. Government provides us with the long as well as small saving schemes, which if we utilize properly it will serve a dual purpose and thus accelerating the growth of a nation as a whole.
