- Under the present low interest rate regime, it also provides the investor with a return of 8 per cent, which is tax-free. one issue to be kept in mind while investing in ppf is the actual time of the year when the investment is made. To understand its importance we must take a look at how interest is calculated.
- Under the rules, interest on the ppf account is calculated on a monthly basis. this means that an early investment during the year will yield a higher return. However, before pulling out your cheque book and rushing to deposit some amount in the account, bear in mind that it would be most appropriate to make deposits between the first and the fifth of a month.
- This is because an amount deposited after the fifth will not be eligible for interest during that month. Take an example to understand this point. let us say you plan to put rs 40,000 at one go into your ppf account. if you put this amount after the 5th of the month then you would lose out on interest for the month. your loss in this case would be just over three hundred rupees at the current rate of interest. thus it is very important to make your investment before the fifth of the month. take a look at the way in which the interest is calculated using an example. according to the details of the scheme the interest is calculated on the lowest balance between the fifth and the last day of each month.
- Suppose you have a balance of rs 3,20,000 in your ppf account at the beginning of the month. now you make an additional deposit of rs 30,000 in the account on the 10th. according to the rules, when monthly interest calculation is undertaken, interest will be paid only on rs 3,20,000 and not on the additional amount because one has to take the lower of the two amounts - rs 3,20,000 and rs 3,50,000 - for the purpose of calculation of interest. to avail of tax benefits one has to pay the subscriptions out of taxable income. hence what usually happens during the process of investment is that the previous month’s salary is received at the beginning of the new month.after this a few days pass wherein various expenditures of the coming months are listed and money earmarked for them. next the remaining amount finds its way into the ppf account. this could mean that you deposit the amount after the fifth of the month resulting in loss of interest for the month. assuming that you have missed the deadline of the fifth, then unless it is the month of march wherein you have no choice to wait for the next month because of the end of the financial year, is there anything you can do with your money? quite a few things, if you really want your money to earn for those 20-25 days. one you can look at a very short term fixed deposit, or alternatively you could put your money in some short term debt fund. these can provide returns in the range of 6.5-7 per cent per annum.
- Further if one has opted for the dividend plan for the investment in the mutual fund then the income can also be converted into tax free form. the benefits from ppf under income tax rules are multifold. under section 88 the investment limit for ppf is rs 70,000 which would qualify for rebate from tax @ 20 per cent. thus if you pay rs 70,000 into your ppf account then an amount of rs 14,000 would be deducted from the tax that you have to pay. further the interest on the account is also tax free which means that when the account matures and the money has been returned to you, then the amount received would not be considered for income tax at all. so, look before you make your ppf investment, because a few days can actually make a lot of difference.
- Pros & cons of PPF:
For those who are looking for liquidity, PPF is NOT a good option. Withdrawals are allowed only after five years from the end of the financial year in which the “first deposit” is made. PPF does not provide any regular income and only provides for accumulation of interest over a 15-year period, and the lump-sum amount (principal + interest) is payable on maturity. The lump-sum amount that you receive on maturity (at the end of 15 years) is completely tax-free!! One can deposit up-to Rs 70,000 per year in the PPF account and this money will also not be taxed and be removed from your taxable income. If you are relatively young and have time on your side, then PPF is for you.
- Whats more is that you can extend the tenure of your PPF account, 5 years at a time, once your account reaches the 15 year limit. This is better in case if you would want to continue investing without any withdrawals.
- How to start ?
A PPF account can be opened with a minimum deposit of Rs.500 at any branch of the State Bank of India (SBI) or branches of it's associated banks like the State Bank of Mysore or Hyderabad. The account can also be opened at the branches of a few nationalized banks, like the Bank of India, Central Bank of India and Bank of Baroda, and at any head post office or general post office. After opening an account you get a pass book, which will be used as a record for all your deposits, interest accruals, withdrawals and loans. However, be warned: you can have only one PPF account in your name.
- If at any point it is detected that you have two accounts, the second account that you have opened will be closed, and you will be refunded only the principal, not the interest. Again, two adults cannot open a joint account. The account will have to be opened in only one person’s name. Of course, the person who opens an account is free to appoint nominees.
So go ahead and start investing....
The earlier you start, the better it is ......!!!!!