Public Provident Fund (PPF)

I have seen that today when people talk of investment, they just talk about ULIP, equity, mutual fund, etc. These days anyone hardly talks about traditional saving plan like PPF, Fixed Deposit, endowment plans, etc. However if one looks closely, traditional plans are still the best bets and often would give the best return over a long period of time. Here I would discuss the features, advantages and disadvantages of the PPF.

Features

• The PPF account could be opened in a Post office or a Nationalized Bank.
• The tenure of the PPF account is 15 years, and could be increased by 5 years on completion of 15 years.
• Investment up to INR. 1,00,000 per annum qualifies for IT Rebate under section 80 C of IT Act.
• The rate of interest is declared every year by Central government. Current rate of interest is 8.8%, compounded yearly.
• Minimum deposit is Rs 500 and Maximum Rs 1 Lakh in a financial year.
• One deposit of Minimum Rs 500 in a year is mandatory.
• If the payment is not made in any year, the account is made discontinued.
• A discontinued account can be activated by payment of Rs 500 and a penalty of Rs 50 per each defaulted year.
• Account can be opened by an individual or by minors through their guardians.
• Even GPF and EDF account holders can open PPF account.
• Loan facility available from 3rd financial year up to 5th financial year. The rate of interest charged on loan taken by the subscriber of a PPF account on or after 01.12.2011 shall be 2% p.a. However, the rate of interest of 1% p.a. shall continue to be charged on the loans already taken or taken up to 30.11.2011.
• The facility of first withdrawal in the 7th year of the account subject to a limit of 50% of the amount at credit preceding three year balance. Thereafter one Withdrawal in every year is permissible. Free from court attachment.
• Interest earned on PPF is totally tax free.
• Nomination facility is available

Advantages of PPF

• Interest is totally tax free.
• Flexibility of investment : If you do not have funds during a particular year, you could continue the account with a minimum deposit of Rs 500.
• Very high returns due to compounding and tax free returns.
• Investment is exempted under section 80C.

Disadvantages 0f PPF

•  Interest rate keeps changing. Its changes every year and is decided by Central Government.
• Long lock in period. Some people think 15 years is a long period to invest.
• Since money is stuck for a minimum of 15 years, so there is a lack of liquidity.