Public Provident Fund or PPF is without doubt one of the greatest and hottest debt devices obtainable to us. Nonetheless, it doesn’t imply it’s risk-free. What are the dangers of investing in a Public Provident Fund or PPF?
No asset class on this earth is totally risk-free. In a method or one other manner, they carry a certain quantity of dangers. Solely nature or color might change. Therefore, understanding the dangers of investing in a Public Provident Fund is most necessary.
Earlier than continuing additional, allow us to recap the options of the Public Provident Fund.
Options of Public Provident Fund or PPF
Who can open it?
(i) a single grownup by a resident Indian.
(ii) a guardian on behalf of a minor/ individual of unsound thoughts. ?
Be aware:- Just one account will be opened all throughout the nation both within the Submit Workplace or any Financial institution.
How a lot to deposit?
(i) Minimal deposit of Rs. 500 in a Monetary 12 months and Most deposit is Rs. 1.50 lakh in an FY
(ii) Most restrict of Rs. 1.50 lakh shall be inclusive of the deposits made in his/her personal account and within the account opened on behalf of a minor.
(iii) Quantity will be deposited in any variety of installments in an FY in a number of of Rs. 50 and a most as much as Rs. 1.50 lakh.
(iv) The Account will be opened by money/cheque and within the case of the cheque the date of realization of the cheque in Govt. the account shall be the date of opening of account/subsequent deposit within the account.
(v) Deposits qualify for deduction underneath part 80C of the Earnings Tax Act.
What in case you discontinue the account?
(i) If in any monetary yr, a minimal deposit of Rs.500/- shouldn’t be made, the stated PPF account shall develop into discontinued.
(ii) Mortgage/withdrawal facility shouldn’t be obtainable on discontinued accounts.
(iii) Discontinued account will be revived by the depositor earlier than maturity of the account by deposit minimal subscription (i.e. Rs. 500) + Rs. 50 default payment for every defaulted yr.
(iv) The overall deposit in a yr, shall be inclusive of deposits made in respect of years of default of earlier monetary years.
What’s the rate of interest?
(i) Curiosity shall be relevant as notified by the Ministry of Finance on a quarterly foundation. The present rate of interest is 7.1%.
(ii) The curiosity shall be calculated for the calendar month on the bottom stability within the account between the shut of the fifth day and the tip of the month.
(iii) Curiosity shall be credited to the account on the finish of every Monetary yr.
(iv) Curiosity shall be credited to the account on the finish of every FY the place the account stands on the finish of FY. (i.e. in case of switch of account from Financial institution to PO or vice versa)
(v) Curiosity earned is tax-free underneath the Earnings Tax Act.
Can we avail a mortgage?
(i) Mortgage will be taken after the expiry of 1 yr from the tip of the FY during which the preliminary subscription was made. (i.e. A/c open throughout 2010-11, mortgage will be taken in 2012-13).
(ii) Mortgage will be taken earlier than the expiry of 5 years from the tip of the yr during which the preliminary subscription was made.
(iii) Mortgage will be taken as much as 25% of the stability to his credit score on the finish of the second yr instantly previous the yr during which the mortgage is utilized. (i.e. if the mortgage was taken throughout 2012-13, 25% of the stability credit score on 31.03.2011)
(iv) Just one mortgage will be taken in a Monetary 12 months.
(v) A Second mortgage shall not be supplied until the primary mortgage was not repaid.
(vi) If the mortgage is repaid inside 36 months of the mortgage taken, a mortgage rate of interest @ 1% each year shall be relevant.
(vii) If the mortgage is repaid after 36 months of the mortgage taken mortgage rate of interest @ 6% each year shall be relevant from the date of mortgage disbursement.
How a lot withdrawal is allowed? ?
(i) A subscriber can take 1 withdrawal throughout a monetary after 5 years excluding the yr of account opening. (if the account was opened throughout 2010-11 the withdrawal will be taken throughout or after 2016-17)
(ii) Quantity of withdrawal will be taken as much as 50% of the stability on the credit score on the finish of the 4th previous yr or on the finish of the previous yr, whichever is decrease. (i.e. withdrawal will be taken in 2016-17, as much as 50% of stability as on 31.03.2013 or 31.03.2016 whichever is decrease).
When it is going to mature?
(i) Account might be maturity after 15 F.Y. years excluding FY of account opening.
(ii) On maturity depositor has the next choices:-
# Can take maturity fee by submitting account closure kind together with passbook at involved Submit Workplace.
# Can retain maturity worth in his/her account additional with out deposit, the PPF rate of interest might be relevant and fee will be taken any time or can take 1 withdrawal in every FY.
# Can lengthen his/her account for an extra block of 5 years and so forth (inside one yr of maturity) by submitting a prescribed extension kind on the involved Submit Workplace. (Discontinued account can’t be prolonged).
# In an prolonged account with deposits, 1 withdrawal will be taken in every FY topic to a most restrict of 60% of stability credit score on the time of maturity within the block of 5 years.
Whether or not untimely closure allowed?
(i) Untimely closure shall be allowed after 5 years from the tip of the yr during which the account was opened topic to the next circumstances.-> In case of life-threatening illness of account holder, partner, or dependent kids.-> In case of upper training of account holders or dependent kids.-> In case of a change of resident standing of the account holder ( i.e. grew to become NRI).?(ii) On the time of untimely closure 1% curiosity shall be deducted from the date of account opening/date of extension because the case could also be.
(iii) The Account will be closed on the above circumstances by submitting the prescribed kind together with the ebook on the involved Submit Workplace.
What is going to occur if the account holder dies?
(i) In case of the demise of the account holder, the account shall be closed and the nominee or authorized inheritor(s) shall not be allowed to proceed deposits within the account.
(ii) On the time of closure attributable to demise PPF charge of curiosity shall be paid until the tip of the previous month during which the account is closed.
Dangers Of Investing in Public Provident Fund (PPF)
Allow us to now attempt to perceive the dangers of investing in public provident fund (PPF).
# Liquidity Threat
One of many largest threat related to Public Provident Fund (PPF) is the liquidity threat. Regardless that mortgage and withdrawal facility is accessible, however they arrive with their very own algorithm and rules. You’ll be able to’t withdraw as per your personal necessities. Therefore, understanding this threat earlier than blind funding is a should for all buyers.
This threat will ease after a yr (to avail mortgage) and particularly after fiver years (to avail withdrawal). Nonetheless, the true liquidity threat will vanish to sure extent publish 15 years completion. As a result of after 15 years completion, 1 withdrawal will be taken in every FY topic to most restrict 60% of stability credit score on the time of maturity within the block of 5 years.
Refer my earlier publish on this regard – “PPF-Mortgage And Withdrawal” and “PPF Withdrawal Guidelines & Choices After 15 Years Maturity“.
# Curiosity Price Threat
As I discussed above, PPF rate of interest will change as soon as in 1 / 4. Have a look at under chart to grasp the historical past of the PPF rate of interest.
You discover that in preliminary years, it was round 5%, then touched the height of round 12% in round 2000 and now at 7.1%. Therefore, in case you are investing and assuming the identical present 7.1% curiosity you’re going to get all through your funding cycle is a whole MYTH. Refer my publish on this regard “Public Provident Fund PPF Curiosity Price 2023 (Historical past From 1968 To Current)“.
# Objective Mismatch Threat
Many individuals blindly put money into PPF with out understanding their precise want. Should you want the cash inside 15 years, then obiviously PPF shouldn’t be an appropriate product for you. Ensure that your monetary aim ought to match your PPF maturity date. In any other case, regardless that you invested in PPF, attributable to its liquidity threat, you might not fund in the direction of your aim totally.
Therefore, by no means make investments blindly. As a substitute perceive your requirement after which make investments.
# Coverage Threat
The most important motive for PPF buyers is security and tax free nature of curiosity and maturity. Nonetheless, when the policymakers change the principles is unknown to us. Should you invested at this time with an assumption that it’s going to stay tax free however in a while if the principles modified, then you must undergo in an enormous manner. The basic instance is of EPF. Earlier no matter you earn as curiosity in your contribution (worker contribution) and your employer contribution was tax free. Nonetheless, now the restrict set in your contribution (Rs.2,50,000) a yr. Should you contribute past this, then regardless of the curiosity earned by such further contribution might be taxable revenue for the worker on yearly foundation. Refer my earlier publish “Taxation Of EPF Contribution Above Rs.2.5 Lakh – CBDT Clarification“.
Therefore, by no means be in a flawed perception that the tax guidelines or the advantages of PPF will proceed without end like how they’re at this time.
# Inflation Threat
PPF is the most effective debt instrument. Little question in that. Nonetheless, PPF alone shouldn’t be sufficeint to fullfill your future long run monetary objectives. Therefore, by no means make investments full quantity in PPF. As a substitute, you want the fairness half additionally to generate inflation adjusted return.
Sadly many individuals not perceive this. As a substitute, blindly they fill the Rs.1.5 lakh hole with out fail. As a substitute, based mostly in your objectives, you need to do the asset allocation and a part of your debt needs to be invested in PPF. In actual fact in case you are following the aim based mostly investing, and PPF is a debt a part of your portfoio, then by no means make investments all debt half in PPF. Primarily as a result of in case of rebalancing, you may’t partially withdraw (as per your phrases) to stability the portfolio. In such a state of affairs, debt funds might be helpful for you.
Conclusion – The concept behind this publish is to not convey the negativity of a product. Nonetheless, the thought is to recommend that DON’T INVEST BLIDNLY simply because PPF provides tax advantages and security of cash. As a substitute, assume past this and in case you understood the above talked about dangers of investing in public provident fund (PPF), then go forward. BLIND EMPTIONAL INVESTMENT IS ALWAYS RISKY.