Some facts you should know about PPF:
Fact 1. Two is too much
Just like a PAN card, every individual is authorized to have only one PPF account in their name. As per the rules, if at any point, it becomes evident that you are operating two or more accounts under your own name, then all the accounts except the oldest one will be force-closed and the principal paid back to you. Any interest that is credited to your account will be reversed and only the original principal is returned.
Fact 2. Yearly contributions limited to Rs 70,000
Simply put, under the current rules, the bank or post office will not accept any amount above Rs. 70,000 limit per year. This limit is fixed by the prevailing PPF rules and is subject to change (This limit used to be Rs. 60,000 until 2002).
Fact 3. Minimum contribution of Rs 500 per year mandatory
As mentioned in our previous post, you need to be contributing at least Rs. 500 every year to keep your account active. This does not mean that if you stop your yearly contributions, the account would freeze and stop accruing interest. You will always earn interest on the funds in your PPF account annually whether you contribute every year or not. However liquidity options like loan and partial withdrawals will be suspended until you regularize your account first. Regularization costs a penalty of only Rs. 50 per non-contributing year, in addition to minimum Rs. 500 deposit for each year missed. Also, any subsequent deposits into a inactive PPF account would require you to regularize the account first by paying the necessary fine.
Fact 4. The current interest paid is 8% compounded and paid annually
This is subject to change. Not too long ago (until 2000), the interest offered on PPF accounts used to be 12% and since then it has been gradually revised down to the current 8%. There is no guarantee that the current 8% rate will stay forever.
Unlike a Fixed Deposit, PPF rates are not fixed throughout the tenure. That means, if PPF rates are reduced to 7% starting April 1st, 2012, your account will earn the current 8% interest until March 31st, 2011. Come April 1st, 2012, your PPF account will earn you 7% until the next revision. The interest credited before April 1st, will remain intact.
Fact 5. Your deposits enjoy tax deduction under section 80C
The entire amount deposited into PPF during the financial year is treated as a deductible under section 80C.
Fact 6. Only the person actually depositing the amount gets section 80C benefit
This means if your spouse deposits any amount into your PPF account, you will not be able to claim the deduction benefits under section 80C. Infact, your spouse will be able to (rightfully) claim section 80C deductions on his/her income! In practice, everyone knows that a couple’s finances are not so clearly demarcated, but nonetheless this is a rule you should be aware of.
Fact 7. You cannot claim section 80C deductions for any amount deposited by you into your parents’ or siblings’ accounts
While tax laws allow you to claim 80C tax benefits for deposits into your spouses account, the same rule does not apply to your parents, siblings or relatives!
Fact 8. Interest is paid only on the funds deposited before 5th of every month
This is another one of those nonsensical PPF rules. You will discover many more like this as you read further.
So what this means is, if you deposit any amount in your PPF account after 5th of the month, your money will not earn any interest for the entire month. Interest although credited on annual basis, is calculated monthly based on the minimum balance between 5th and end of the month. If you find yourself investing in PPF anytime after 5th of the month, you would do better by delaying your investments for a month (if you can) so that the money would stand a chance of earning at least savings interest in your bank account. The best time to invest is between 1st and 5th of every month, better still if you can invest the whole Rs. 70,000 by April 5th .
Fact 9. Date of deposit is the cheque realization date and not the cheque presentation date!
If you are depositing a cheque or demand draft, then the date of deposit that will appear in your PPF account will be the date of cheque clearance and not the day you present the cheque. Combine this rule with the previous 5th-day-of-the-month rule and you have a situation where a whole month’s interest is at the mercy of your bank and the clerk doing your paper work. Even if you deposit the cheque on the 1st of the month but fails to clear by the 5th for whatever reasons, the previous rule will rob you of your whole month’s interest!
Fact 10. You get only 12 attempts per year to deposit into PPF
You can deposit funds in a lump-sum or deposit in installments. If you go the installment route, you only get a maximum of 12 installments per year. There is no 13th. That said, 12 is a fair number and should be enough for anybody.
Fact 11. No joint accounts allowed!
PPF is strictly an individual account and joint accounts are not possible. However you can always have one or more nominees for the funds in your account.
If you wish to create a PPF account for yourself and your spouse, then the recommended way is to open two different accounts individually and cross nominate each other. Although the funds will stay separate, as an added advantage, you get to benefit from tax-free interest on the combined limit of Rs. 1,40,000 per year.
Fact 12. Every account has to complete 15 years mandatorily
There is no option to prematurely close a PPF account before the mandatory period of 15 years, except in case of death of the account holder. You have an option to borrow or partially withdraw from your PPF account subject to some restrictions.
Fact 13. The full term of a PPF account can actually be 16 years depending on when you open it!
This is a consequence of one of the PPF rules which will leave you scratching your head. PPF works on financial year basis (April 1st – March 31st) and interest is credited only at the end of financial year. As per the rules, a PPF term extends 15 years from the “end of the financial year” in which you opened the account. This rule straightaway gives you an extension of 1 year, whichever way you look at it. So if you were to open a PPF account on the 1st of April 2010, the counting actually begins from the end of the year, i.e. 31st March 2011. So your account will mature on 31st March 2026 and not 31st march 2025!
When PPF was introduced in 1968, there were no computers and everything was maintained by an army of clerks by hand. All the rules framed back then were to simplify compliance work for the army of personnel managing PPF accounts. So all the PPF rules discussing time lengths began with a statement like “from the end of the financial year in which account was opened”. This supposedly made calculations easier, it seems , The practice still continues.
Fact 14. You can continue your PPF account even after 15 years if you chose to
You will have two options to choose from.
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Continue for 5 years with subscripttion
Here you will be allowed to invest up to 70,000 every year, just like a regular PPF account.
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Continue for 5 years without further subscripttion
You will not be able to invest any further, but the account will continue to earn interest at the prevailing rates.
You can exercise these options as many times as you wish.
Fact 15. NRI’s are not allowed to open PPF accounts
NRI’s (Non-Resident Indian) are not allowed to open new PPF accounts. If you were a resident at the time of opening your PPF account but subsequently became a NRI, you will be allowed to retain your account until maturity, after which it has to be mandatorily closed. The 5 year extension offer is not available to NRI’s.
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