Recent top changes in the most popular investment vehicle _ Public Provident Fund

Article by CA Rishabh R. Adukia, B.Com, ACA, ACS, LLB, MBF(ICAI), Certified Financial Planner

The Ministry of Finance came out with a notification dated December 12, 2019 on Public Provident Fund Scheme, 2019 (PPF Scheme, 2019). The earlier PPF Scheme was issued in 1968.

PPF is one of the most popular small savings schemes that offer a guaranteed return. PPF accounts have a maturity period of 15 years and the government announces interest rates for each quarter. For the current quarter PPF fetches interest rate of 7.9% per annum. Interest is calculated for a calendar month on the lowest balance at the credit of an account between the close of the fifth day and the end of the month. Interest is credited to the account at the end of each financial year.

The comparisons in both schemes (old and new) as discussed above are highlighted in the following table.

Old Rules (PPF Scheme, 1968)

New Rules (PPF Scheme, 2019)

An individual can invest only upto 12 times in a year.

No cap on the number of times an individual can invest.

Loan on money invested with PPF was 2% higher than the prevailing rate of interest.

Loan on money invested with PPF is only 1% higher than the prevailing rate of interest.

Minimum amount to deposit was Rs.100 and multiples thereof with a cumulative limit to Rs. 1.5 lakhs in a year.

Minimum amount to deposit is Rs.50 and multiples thereof with a cumulative limit to Rs. 1.5 lakhs in a year.

Premature closure of PPF was allowed after 5 years, in case of account holders death, higher education of account holder, life threatening illness in family.

Old rules continue and two more conditions have been introduced:

  1. Now, a PPF account holder can close the PPF account after 5 years, in case of change in residency status (when you become an NRI or when an NRI becomes a resident) on the production of a copy of passport and visa or income tax return. However in that case, the account holder will earn 1% lower interest. This is great benefit to those NRI’s who are returning to India and want to redeem money from their PPF account, but they had to wait for 15 years lock-in-period. However a Resident becoming NRI will continue to earn interest on his PPF balance.
  2. Now the PPF can be withdrawn to finance higher education of the dependent children of the account holder and for that, one has to submit fees bills or confirmation of admission in a recognized institute of higher education in India or abroad.

 

NRI investors could not open a fresh PPF account, however if they have an existing account they can continue holding it till maturity and then close it.

 

Banks are currently not allowing opening of PPF accounts for NRI.

 

If you choose to extend your PPF account on maturity with the option of “without deposits”, you could still choose to deposit the money when you renew if further after 5 yrs. Renewal can be done after a block of 5 years for as many years desired.

If you have not made any deposits for 1 year after maturity i.e. 15 years, you will never be able to deposit the money after that in PPF account. All you can do is continue the PPF account and it will earn the returns till there is any balance. Renewal can be done after a block of 5 years for as many years desired.

 

In our opinion the most important change made in recent Finance Ministry's notification in regard to PPF is lowering the interest rate on loan against PPF from 2 per cent to 1 per cent and making it at par with other instruments. Also earlier, the premature closure of PPF was not allowed, now one can close one's PPF account after five years of investment, also a joint PPF account can't be opened.

Other changes include one PPF account for one person including minor child and the maximum limit of Rs 1.5 lakh by an individual shall be inclusive of the deposits made in his own account and in the account opened on behalf of the minor.

The facility of loan from the PPF account is available from the third financial year till the end of the sixth financial year. The loan taken has to be repaid within 36 months, interest amount has to be repaid in not more than two monthly instalments post the repayment of principal. If the loan taken is not repaid within 36 months, then the interest on the outstanding loan will be charged at six percent. The new interest rate will be applicable for the loan taken after December 12, 2019. Interest chargeable on loans taken prior to this date will continue to be two percent. However, there is a word of caution for PPF account holders that, when a loan is taken from the PPF account, then the account does not earn any interest until the time the loan is repaid. The account holder would lose out on the tax-exempt interest that would have been earned had the loan not been taken.

The other benefit includes protection of credit balance from attachment. i.e. amount standing to the credit of any account holder shall not be liable to attachment under any order or decree of any court in respect of any debt or liability incurred by the account holder.

 

 

Here is a table showing the names of the new forms as against the names of the old forms:

Name of the Form

OLD Form

NEW Form

a) Account Opening Form

Form A

Form 1

b) Contribution Form

Form B

Not specified

c) Partial withdrawals

Form C

Form 2

d) Account closure after maturity

Form C

Form 3

e) PPF Loan

Form D

Form 2

f) Extension Form

Form H

Form 4

g) Premature Closure Form

N/A

Form 5

h) Nomination Form

Form E

Form 1

 

Conclusion

There are not too many major changes in the PPF scheme, however one must keep the above points into consideration while taking any decision. It seems the government is making efforts to bring the PPF as an investment vehicle at par with other instruments by providing the flexibility to withdraw and borrow at the best prevailing rates.

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