DTC to make PPF Attractive once again!

The proposal to treat the Public Provident Fund (PPF) as Exempt, Exempt and Exempt(EEE) under revised proposal of Direct Tax Code (DTC), implying  making contribution, accretion and withdrawals tax free,  is slated to make PPF , the  flavor of the season.

This scheme had lost  its charm to some extent after the ELSS ( Equity Linked Savings Schemes) was made eligible for deduction under Section 80 C upto Rs. One  lac with benefit of  EEE. Now that  EEE status will be discontinued for ELSS,  as per the  proposed revised DTC,  whereas    it will be continued for PPF, the  move certainly ensures revived interest in  PPF.

Hence  it is very important to know what does actually PPF entail.

Opening of the PPF Account

You can open  PPF account  with State Bank of India, its subsidiaries and designated branches of nationalized banks. A PPF account can also be opened with designated post offices as well.

You can open a PPF account for yourself or as guardian of  your minor children or a minor for whom you have an authority in case parents of the child are not alive or the alive parent is incapable of action.   The account of the minor child can either be opened by father or mother however both of you can not open the account in respect of the same minor.

PPF account  can not be opened in the name of an HUF or association which you are a member, as earlier,   however  HUF can claim deduction under section 80 C in respect of contribution made by it towards the PPF account of any of its members.    Also NRIs cannot open the  PPF account, however NRI can continue to operate the account till its maturity.

You need to apply in form no. B for opening the PPF account with a photograph and proof of Permanent Account Number. If you do not have a PAN, then you can furnish attested copies of either your ration card, voter’s ID card or passport.

Operation of the account

You can deposit any amount between Rs. 500 and Rs. 70000 in the PPF account however restricting it to 12 deposits in a  financial year. Though , you can make more than one deposit in an account in a particular month but without  exceeding the 12 deposits in a financial year.

It is advisable to deposit the money well in advance if you are planning to deposit  it at the year end,  as the date of deposit in case of payment of cheques or draft will be the taken the date of realization of the instrument date on which the cheques is realized by the bank, and not the date of tender.

In case the cheque is realized after 31st March, you will not be able to claim the tax benefit for that year which you had planned and would land up paying unplanned tax.

Unlike recurring deposits  or SIPs of mutual funds, in PPF, you  can deposit variable amount at variable  intervals  within the limit of maximum amount of Rs. 70,000 to a maximum of 12 deposits in a year.

Interest and tax benefits

Interest on PPF  is presently 8% calculated on the minimum balance between fifth of the calendar month and close of the month. The interest so calculated is credited to your account at the end of the year and thereby depriving you of the monthly compounding effect. It is high time the government modifies this and brings the rule at par with interest payable to holders of saving bank account.

The money deposited in a PPF account up to Rs. 70,000 is eligible for deduction under Section 80 C of the Income Tax Act.

You can make contribution to the PPF account of yourself, your spouse and your children and claim deduction under Section 80 C of the Income Tax Act. However you can not deposit more than Rs. 70,000 in your PPF account together with the PPF accounts of all the minor children put together. Husband and wife between them can deposit Rs. 1,40,000 either in their own account of accounts of their children or any combination thereof so as to ensure that note more than Rs. 70,000 is deposited in a single account.

The interest earned on the PPF account is fully exempt from income tax presently and is proposed to be exempt under DTC.

Loan from the account

Though the tenure of the account is 15 years, your money does not get blocked absolutely for that period. You can exercise two options, either to take loan from the account or make partial withdrawals.

After completion of five years from the financial year in which the initial subscription was made, you can permanently  part withdraw your money every year  in stead of taking the loan.

The money you can withdraw should be lower of the amount lying to the credit of your account at the end of the last financial year or an amount equal to 50% of amount lying to the credit of your account on fourth year preceding the year of withdrawal.

Maturity and Extension

You can not close this account before completion of 15 years but after completion of 15 financial years,  the amount  can be fully withdrawn.

In case you want to discontinue with the account,  , you need not make any deposit in the account.  You will continue to earn interest at the rates applicable to regular PPF account.

After maturity, the  PPF account can be extended for each a block of 5  years indefinitely. You have to exercise the option before expiry of one year from completion of 15 financial years or the extended period by submitting form H to the  bank/post office where you have your  PPF account.

Nomination

The PPF account can only be opened in single name, and not in  joint names. However, you can appoint one or more nominees in respect of your PPF account by filing the form no. E. You can revise or cancel the nomination as many times as you want during the tenure  of the account. No nomination can be filed in respect of PPF account of a minor.

You can check with the bank for nomination details.

And lastly the icing on the cake. As per section 9 of the Provident Fund Act, 1968 the amount lying in the PPF account cannot be attached under any decree or order of any court in respect of any debt or liability incurred by the account holder. This will ensure peace of mind and assurance that the money being saved in PPF will be exclusively available for the use of the accountholder or the legal heirs.

Even if you are contributing to the provident fund through deduction from your salary, you should have a  PPF account. Besides it is a good retirement corpus building instrument for self – employed.

This way we see that a PPF is winner all the way!

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