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Tuesday, May 31, 2016

9 Facts about your PPF Account which you may not be aware

[Last Update : 5-Nov-2017]
If you are earning and saving money, then it is almost guaranteed that you had the wisdom to open a Public Provident Fund (PPF) account. If not, please get one done now - for there is no bigger secret to wealth generation than disciplined saving compounded over time, and EPF and PPF do just that for you. 
Those who have been operating a PPF account for a while ought to know some of these lesser known facts about their account....Read on...

1. Account Maturity is between 15 to 16 years
Most people understand that the PPF Account actually matures in 15 years before you get an option to extend. Well, that is not really true. The maturity period of a Public Provident Fund (PPF) account is calculated from the end of the financial year in which the account was opened. For instance, if you opened your PPF account on 30 May 2001, the account has completed 15 years on 30 May 2016, but would not mature on this date. The 15-year period would begin only from the end of 2001-02 (31 March 2002). Therefore, your account will mature only on 31 March 2017. Therefore, the life of a PPF account before extension can be anywhere between 15 to 16 years, depending on the date on which the account was opened.

2. PPF Account can be indefinitely extended
Even after 15-16 years, once your account has matured, you can continue to extend your PPF Account in blocks of 5 years for an unlimited period of time. However, there are rules governing the extension of your accounts. You may want to read more about the PPF account extension rules here --> PPF Account Extension after 15 Years

3. PPF Account gets automatically extended
If you don't submit an application for tenure extension, the PPF account tenure automatically gets extended but you cannot make further contributions to it. The balance in the account will continue to earn interest, but you will no longer be required to invest the minimum amount in the account every year. Once this option of continuing without contribution has been selected (Read PPF Account Extension after 15 Years), the subscriber cannot alter it to make further contributions to the account. 

4. PPF Account can be easily transferred
When I moved from Vadodara to New Delhi while I was working with Larsen & Toubro Limited, I got my PPF Account transferred as well. This ensured that I did not lose on the power of compounding. It was pretty straightforward by submitting an application with the bank. You can not only transfer the PPF account to another bank, you may also transfer it to your nearest post office branch, whichever is more convenient for you.

5. PPF Account can be foreclosed
Most investors believe that the PPF account, once opened, cannot be foreclosed before 15 years of mandatory tenure. Well, that is not true from 2016. The government has allowed investors to close their PPF accounts early if the account in question has completed five years. The account can be closed if they require money for their children's higher education or for medical treatment. However, there is a penalty for foreclosure. The investor gets 1% less interest on all the preceding years. This 1% can be a very significant amount especially if you have been invested for a longer duration. Moreover, foreclosure of an account like PPF usually defeats the very purpose with which you started investing in PPF. Therefore, this is not a good option unless there is a real emergency. 

6. NRIs cannot open or extend an existing PPF Account
Non Resident Indians, who had opened their PPF account, before they became NRIs are allowed to only operate their PPF Account. However, any extension after the 15-16 year maturity will not be granted to NRIs. They are also not allowed to open any new PPF account as long as their residential status is NRI.

7. Existing NRI Accounts are deemed closed, earn only 4%
According to the Oct 2017 amendment to the Public Provident Fund Act, 1968, if a resident who opened an account under this scheme subsequently becomes a non-resident during the currency of the maturity period, the account shall be deemed to be closed with effect from the day he or she becomes a non-resident.
Interest with effect from that date will be paid at the 4 per cent rate applicable to the post office savings account up to the last day of the month preceding the one in which the account is actually closed.
[Recommended Blogpost--> The Definition of NRI]
In view of this amendment, NRIs may not find PPF to be a lucrative option anymore. They will have to fall back on options like Liquid Funds, Balanced Funds or even Fixed Deposits.

8. Your investment limit does not increase by opening multiple PPF Accounts
One of the very common 'strategies' adopted by salaried class is to open multiple PPF Accounts in the name of their spouse and children. And the most common reason to do so is to be able to invest more than the annual upper limit allowed in one account. As far as spouse is concerned, so far so good. But opening a PPF Account for a minor child does not serve this purpose. This is because the PPF rules do not allow you to invest more than the upper limit (currently INR 1.5 Lacs) in both the accounts put together (you + your minor child). Many of my friends have countered me and said that they have been successfully investing more than 1.5 Lacs per year in the combination of two different accounts - one of their own and the other of their minor child. Well, the fact is that it may be happening but then, that is just lack of governance from government side and nothing else. The law still does not allow you, and there are penalties if the government comes to know of it.
[Recommended Blogpost--> Opening Multiple PPF Accounts in India]


9. PPF Interest Rate is not fixed even for a year
With effect from 1st April 2016, interest rate on PPF Accounts will be reviewed every quarter. PPF rates will be bench-marked against corresponding G-Sec yield. PPF will earn 0.25% additional interest over and above G-Sec yield of last quarter. 

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The book "From the Rat Race to Financial Freedom" has many such investment concepts explained in a very simple and uncomplicated manner, especially in the Indian context.

Cheers


Manoj Arora
Official Website 

Revision History:
31-May-2016 : 1st edition
07-Nov-2017 : Addition of a new points - 7 & 9

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