Tuesday, June 29, 2010

All you wanted to know about Public Provident Fund

A Guest asked :
Can i open a PPF account for me and my minor daughter (i will be the guardian) at the same time? This is just for investment purposes and not for any tax rebates.

Dear Friend, u can open PPF account for you as well as your Daughter. Even if you want to claim Tax benefit you can claim a maximum of  Rs.70K between these 2 accounts.

In fact you can open total 3 PPF accounts.
1 for yourself
1 for your wife
1 for your Daughter
Try to Avoid Investment in PPF.

Start SIP of Rs.1000 P.M.or more in any Equity / Balance Fund like
DSPBR Balance Fund/Religare Business Leaders Fund/HDFC Prudence Fund.

Best of luck,
Srikanth  Matrubai


Conservative investor’s first choice has been the Bank Deposits and the Public Provident Fund (PPF). This is due to their guaranteed returns even though these are lower than Mutual funds.
PPF is the most risk free form of investment in India and is quite tax efficient too. And, so, it is not surprising that this is the most popular investment option across the earning class.
Self employed persons who are not covered by Employee Provident Fund should seriously look at PPF as a retirement planning option.

PPF can be opened in any Post Office or with any branch of the State Bank of India and its associates.

The Effective duration of a PPF account is 15 years plus the year of Account opening, so 16 years.

Tax Angle:
1)All investments in PPF (subject a ceiling of Rs.70000) is eligible for Tax Rebate under Sec80c
Contribution to non-earning spouse and/or minor child will be clubbed as your contribution under Sec 64.

2)Though the term of PPF account is 15 years, the contribution made in 16th year (even on the last day) also qualifies for section 80C tax benefit

3)The New Direct Tax Code has recommended that PPF withdrawal on maturity will attract Tax. Not sure, whether this will be recommended. If yes, returns will be drastically affected. But thankfully, the Tax Code has also clarified that only new contributions made on or after the commencement of the code will be subject to tax. So, those withdrawing before 31March 2011 stand to gain.
4) The interest earned in the PPF is exempt from Tax.

Who can invest?
PPF can be opened in your name, your spouse and even children. It can be opened by an individual on behalf of a HUF. Bachelor or married, dependent or otherwise. The only restriction is that total aggregate contribution in all the PPF accounts should not exceed Rs 70,000 in a financial year (i.e. 1st April to 31st March)(The limit of 70k is applicable to individual and minor combined together. Spouse and children who have attained majority are excluded from the 70k limit.

Non Resident Indians may also open a PPF account out of the funds in the applicant's non-resident account in India in banks subject to the following conditions -

The account is marked as non-resident account
All credits therein or debits thereto are made subject to the same regulations as are applicable to non-resident accoun

How to operate?

The maximum you can invest in the PPF in a financial year is fixed at Rs.70000/-. You can contribute as many times you want in a year. The minimum is Rs.500 and the amount need not be fixed and can vary. It must be ensured that your instalments does not exceed 12 in a year.

A minimum of Rs.500 must be compulsory be invested/contributed to keep the PPF account active.

If you do NOT require the PPF money immediately after the mandatory 15 years, you have 3 options :
1)Close the PPF account and withdraw the entire amount
2)Continue the PPF account with fresh subscription. This however, compulsory extends the PPF for another 5 years. Note, you can still have access to 60% of the accout balance at the commencement of each year during this 5 years. And most importantly, you will continue to get 80c benefits.
3) Continue the PPF account without making any further contribution and continue to earn the same of interest. This can be carried for a indefinitely.
If you choose this option, you can withdraw the entire PPF amount either in a lump sum or in installments. However, you’re not allowed more than one withdrawal in a financial year and the balance will continue to earn interest.
4)At the time of withdrawal, if the PPF account holder has become a major, then the proceeds will be deemed as his income and taxed accordingly.

Points to Note :

1) Never forget to appoint a nominee. This applies to all your financial investments, let it be PPF, Mutual Funds, etc.

2).Invest regularly (if possible, monthly) and do not wait for the year end to invest in the PPF.

3) Invest before 5th of every month. Interest is calculated on the lowest balance between the close of the 5th day and the end of the month.

4) Let the money grow. Even though PPF allows Partial Withdrawal from the 7th year and also facility of loan from the 3rd-6th year, try to avoid this unless it is inevitable.

5) A monthly contribution of 5000 in the PPF account for the period of 35 years, will get you 1, 07, 87, 000. Yes, you will become a crorepati.

For calculation of interest and maturity value of PPF click here


7) Interest on the PPF is currently @ 8%. This is compounded annually. Interest is calculated on the Lowest Balance between the 5th day and the last day of the Calendar month and is credited on 31st March every day.


Investing through the time tested way of SIP and being patient ensures you excellent real returns.
12% is a very realistic return that one can expect from Mutual Funds. So, if you instead of PPF invest in Safe/Conservative/Defensive Mutual Funds, then @12%, the difference of your PPF investment of Rs.6000pm,will give a huge positive difference of Rs.8,16,917!!!!!!.
PPF = 2,038,671
Mutual Funds = 2,855,588
Moreover, I have assumed Mutual Fund returns at a very conservative 12%.

The Choice is yours.

srikanth matrubai

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  1. hi

    i need a info on HDFC and icici Gold ETF can u share ur view for investment purpose?

  2. different take :


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