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If you haven’t already started on a long-term savings strategy, you could begin on one this April with a Public Provident Fund (PPF) subscription. I believe that the PPF was started by the Government of India in lieu of social security. (I doubt if a Government can ever provide social security to a billion plus people.)
Your money in the PPF account is perfectly safe, earns 8% (at the moment), qualifies for Section 80C of the Income Tax Act, and at the moment is EEE (Exempt Exempt Exempt – the money you invest, the interest earned, and the final withdrawable amount are all tax exempt). You can invest a low of 500 rupees and a high of 70,000 rupees a year (over a maximum of twelve installments per year). You are also allowed to withdraw money or take a loan; there’s a weird formula to compute the same, but I advise against doing so ever.
At the end of 15 years, you can either extend your subscription in blocks of 5 years or else close the account and reap the benefits. The PPF is a great way to set aside money for say your child’s higher education. You can open a PPF account at State Bank of India (SBI) or any of its subsidiaries or at the local post office. An individual is allowed to have only one PPF account.
Click here to download a PPF calculator.
The calculator above can be used for quick reference. The only input you need to enter (in cell B3 — highlighted in yellow) is the amount you are ready to put into your PPF account each month. The calculator gives you an idea of the maturity amount that you can expect over a 25-year period.
Let me know if you find this to be useful. If you already have a PPF account, what goals did you have in mind when starting one?
Update: September 25, 2008
Below is a continually updated list of PPF-related queries which are answered in leading financial magazines such as Outlook Money and Money Today.
From Money Today, September 18, 2008 — Page 30
Q: My wife wants to open a Public Provident Fund (PPF) account in her name and another in the name of our minor daughter. I do not have a PPF account. Who will be eligible for the deduction for the money deposited in our daughter’s PPF account — my wife or I?
A: One can open a PPF account in one’s own name or in the name of a minor as a guardian. However, you can have only one PPF account in your name. If you have two PPF accounts, one will be closed and you will be refunded only the principal, not the interest. Also, two adults cannot open a joint account, though an account-holder is free to appoint nominees. Since your wife is planning to open an account in her name, your daughter’s account will have to be under your guardianship. Therefore, you will be eligible to claim a deduction for contribution to that account. Your wife can claim a deduction for the contribution she makes to her own account. A PPF account can be opened even if you have an Employees’ Provident Fund account with your employer.
From Outlook Money, October 08, 2008 — Page 24
Q: I have a PPF account with SBI. I extended it for five years after the account’s first 15 years got over in 2006. The bank says that since I have withdrawn 60% of the balance as was in 2006, which is the maximum amount permitted to be withdrawn from an extended account, no withdrawal will be possible for the next two years. What are the rules regarding withdrawals from an extended PPF account?
A: Assuming that you have made new deposits during the extended period, the rules regarding withdrawals in an extended PPF account stipulate that only one partial withdrawal is allowed each year subject to the condition that the total of thw withdrawals during the 5-year extended period shall not exceed 60% of the balance as on the start of that period. The bank’s refusal is in accordance with this rule.
Q: As with various payments, is it possible to have standing instructions for transfer of funds from a savings account to a PPF account? If yes, then how can this be done?
A: Yes. It is possible to give standing instructions to the bank to transfer excess amount from your savings bank account to a PPF account, provided the two are with the same bank. You also need to keep track of the amount being transferred as PPF contributions in one financial year cannot exceed Rs 70,000.
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