The tax-free deposit scheme offered by the Indian government is a PPF or Public Provident Fund come with a set of interest rate which is compensated by the Government of India. The effective PPF interest rate is set at 7.1 per cent for the second quarter of the fiscal year, 2020-21, that is, from 1 July to 30 September 2020. The interest rate for April through June 2020 was 7.1 per cent.
In the Fixed Income environment, the PPF is considered to be one of the best among the investors of India. PPF interest rate is compounded on a monthly basis at the lowest balance between the closing date of the fifth day and the last day of every month. However, the amount that is invested in the account by the 5th day of the month is given only consideration. But besides that, let’s go through some substantial details you need to read about PPF.
- The interest rate given on the PPF is not fixed but is correlated for 10 years to the yield of government bonds. The rate does not adjust on a daily basis but is fixed at the beginning of a quarter depending on the average bond yield for the following three months.
- You can invest in PPF for a tenure of 15 years and after that, you can either extend it for five years after the maturity period or choose for an exit by withdrawing your amount.
- If you wish to extend the account and also invest, you must send an application to the post office or bank before the end of one year of maturity. The account will be further expanded for a term of 5 years as a result.
- Your account will immediately be augmented and will not allow deposits in the event that you do not update the bank or Post Office for your account extension. The amount in your account keeps earning the regular interest and you can only render withdrawals in a fiscal year.
- The tenure of 15 years doesn’t mean that it is a lock-in term. The period of 15 years is from the day of the opening of the account. For example, if the PPF account was opened on January 1, 2010, it will mature on March 31, 2025, i.e. from March 31, 2010, 15 years. At maturity, the PPF account can be extended progressively in 5-year periods.
- You can make a partial withdrawal up to 50% from the account balance at the end of a fiscal year preceding the current year or at the end of the sixth fiscal year prior to the current year and this partial withdrawal is permitted only once per annum.
- The clause to reap the benefits of the PPF account loan is effective from the 3rd financial year until the 6th financial year after the starting date of the account. Alternatively, at any period after the end of the fiscal year in which the account was opened, but until the expiry of 5 years after the end of the financial year in which the account was created, the loan can be availed up to 25% of your account. It involves 1 per cent per year and has to be repaid within three years. An investor will not be able to take out new loans in case of an emergency until the loan is repaid.
- In your PPF account, you can make a minimum investment of Rs.500 up to Rs.1.5 lakh annually. As well, the minimum contribution of Rs 500 must be maintained in accounts extended for 15 years. Your account becomes dormant however if you fail to make the minimum contribution every year, you need to pay a penalty of Rs.50 to renew your account. In the event you make the investment higher than Rs 1.5 lakh in a year then no interest on the excess balance will be paid, even if the deposits are made by mistake. The overall cap of Rs 1.5 lakh per year allows the deposit made in the PPF account on behalf of a minor and will therefore give you additional tax advantages.
- In PPF, the interest is compounded annually but determined each month. The interest is on the lowest balance of each month during the fifth and last day. The deposit would also receive applicable interest for the month in the event that you contributed before the fifth day. Make sure that you deposit it at least 3-4 days before the cut-off date if you are making a contribution by cheque.
- Investments, under the cap of Rs.1.5 lakh, are eligible for tax deductions under Section 80C. Interest earned does not fall under the tax deductions, but must be reported on his or her tax return by a PPF account holder. Making a withdrawal is non-taxable and has no influence on the tax liability of the account holder.