5 Questions About PPF :

The Public Provident Fund, or PPF, is predominantly a tax-saving instrument but wins on numerous aspects. While it has a definite lure for the risk-averse investor, it is a smart retirement vehicle that makes it a good consideration for any individual.

Here are 5 questions that are often asked of this instrument.

1)      Is the return assured?

The return is most certainly assured but flexible, not fixed. The account holder is promised a return every year, though the exact figure fluctuates annually and is decided by the Reserve Bank of India. Initially it was fixed and was as high as 12% per annum. Over the years it got lowered to 8% and crept up a bit again. The returns are reset every fiscal year and are benchmarked against the 10-year government bond yield. From April 1, 2012, the rate was 8.8% per annum but got lowered to 8.7% per annum from April 1, 2013. This year the interest rate was left unchanged.

2)     How often is it compounded?

The interest on the PPF account is compounded annually, as against the National Savings Certificate where it is compounded half yearly.

Though the interest is compounded annually, the calculation is done every month. It is based on the lowest balance in the account between the end of the 5^th and last day of the month. While the calculation is done every month, the money is credited to the account only at the end of the year.

If you are doing a lump sum investment into your PPF account, do it before April 5. That way you get the most benefit because your deposit will earn interest every single month. If you are investing in installments all through the year, it really does not make a significantly huge difference if you deposit the amount before or after the fifth day of the month. However, over the tenure of 15 years it would add up. So attempt to make the deposit before the 5^th of the month. If you deposit it later, you will miss the interest you could have earned that month.

3)     Who can open an account?

Only resident Indians are permitted to open a PPF account. Non-resident Indians are not eligible to open an account. However, a resident who becomes an NRI during the account’s tenure can continue prescribing to the PPF account though the money in this account is maintained strictly on a non-repatriation basis.

Only one account is permissible per individual. However, a guardian or parent can open an account for himself/herself as well as one for a minor.

Importantly, a PPF account cannot be held jointly though nominations are permissible. In fact, it is wise to do so. The nomination can be cancelled or updated by filing a fresh request.

4)     What is the tax break?

This is the only exempt-exempt-exempt, or EEE, scheme available in India. This indicates that it is exempt from tax all the way. When you deposit money in the account, you get a tax exemption under Section 80C. The interest earned is also tax free. On maturity, the lump sum (interest earned + principal invested) is not taxable.

The limit in a financial year is Rs 1 lakh under Section 80C. This is the limit whether you invest in your account and in any other PPF account where you are the guardian. The PPF limit is Rs 1 lakh for an individual, not per account basis.

5)     Is it risky?

There is no chance of someone running away with your money. Or later on being told that there is no way your money can be returned to you. The PPF is a sovereign-backed instrument which means it is backed by the government. This is the highest security an investment can have and, therefore, the safest.

Moreover, investments in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder. 

Source :: //www.moriningstar.in dated 20.05.14.//