The public provident fund is the most popular investment plan in India. It has interest income as well as tax benefits. One can open the PPF account with post office or designated banks. So the public provident fund is safe too with the investment purposes as it has minimum risk factor among all investment options. These are five most important factors with PPF which are necessary to know.
There is no fixed interest rate in Public Provident fund. It linked to the market and commonly it is 0.25% higher than the government yield 10 year bond. The rate of interest to be decided every year in April. The current rate of interest is 8.8% which will surely be reduced in the month of April 2013 as the 10 year government yield has less than 8% rate of interest. The rate of interest for 2013-14 may be 8.5% or less as per analysis say.
The interest calculation is not straight in public provident fund account. Interest on PPF account is compounded annually but the interest calculation is done every month.
Interest is calculated on the lowest balance between the fifth and last day of every month. So one can get full month interest if the contribution is made before or on 5. If one is paying PPF contribution through cheque, one must do it 3-4 days before for getting full month interest as 3-4 days are normal in cheque clearing system in India.
PPF is income tax free at all three stages. First, the investment made in PPF account is tax free under section 80C of income tax act. Second, the interest earned on PPF account is also tax free. Third, the withdrawal from the PPF account is also exempted from income tax.
Direct Tax code has purposed for withdrawing tax benefits from the public provident fund account with the relief for the existing account holder. But government has faced strong opposition for this move. Time will tell when the DTC will come into force as when will happen on tax benefits for PPF account.
Investment limit for Public provident fund account is 1 lakh per year which may be invested in installments not more than 12 per year. One shouldn’t invest more than 1 lakh in PPF account as the interest may be forfeited for any extra amount invested above 1 lakh. There is a minimum limit too. An account holder must contribute 500 Rs. per year in PPF account. If failed to do so, there is a penalty of Rs. 50 for this.
Public Provident Fund account matures in 15 years. One can extend the PPF account with a block of 5 years after the maturity. But in this case, one needs to invest 500 rupees per year minimum in this account. The extended period is not the lock period. Lock period will reduce with every year like after the 12 years; lock in period will be 3 years.
If you need money, you can withdraw after the sixth year, but it cannot exceed 50% of the balance at the end of fourth year, or the immediate preceding year, whichever is lower. You can also withdraw only once in a financial year. You can also take a loan against it, but this cannot exceed 25% of the balance in the preceding year. The loan is charged at 2% till 36 months, and 6% for longer tenures. Till a loan is repaid, you can't take more loan.
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