Navigating the maze that is personal finance

Friday, 18 November 2016

All about Public Provident Fund (PPF)

What is it?

  • It is a 15 year account designed as an instrument of long term savings.
  • It helps to inculcate a habit of savings and build a retirement corpus.
  • PPF is easy to open and operate and transferable between different banks, branches or post office.
  • The maturity proceeds are tax free.

Who can open a PPF account?

  • Any Indian citizen older than 18 years of age can open a PPF account in their name.
  • Joint accounts are not permissible under PPF rules.
  • Parents can open PPF on behalf of their children, however the total deposit jointly cannot exceed Rs.1.5 lakh in their own and their child's account.
  • An NRI cannot open a fresh PPF account but if they have acquired NRI status after opening the account, then they can continue to operate it but the tenure cannot be extended after maturation.
  • Grandparents cannot open account on behalf of minor grandchildren.

Where can you open a PPF account?
  • Account can be opened in post offices as well as designated branches of nationalized and private banks authorized to operate PPF account

What are the documents required to open a PPF account?

  • ID proof
  • Address proof
  • PAN card
  • Photographs
  • Proforma application
  • Nomination from

Interest rate

  • Till now the interest rate was announced by government every year. It was 8.7 % per annum for financial year (FY) 15-16. Beginning, FY 16-17 the rate will be announced by the government every quarter. The interest rate was brought to 8.1% in the third quarter of FY 16-17.
  • The interest rate is compounded yearly.
The table below shows the PPF interest since the last 15 years. As you can see the interest rate has remained in the range of around 8% per annum over this period.



Financial
Year

Interest
rate (per annum)

2000 - 2001

11.00%

2001 - 2002

9.50%

2002 - 2003

9.00%

2003 - 2004

8.00%

2004 - 2005

8.00%

2005 - 2006

8.00%

2006 - 2007

8.00%

2007 - 2008

8.00%

2008 - 2009

8.00%

2009 - 2010

8.00%

2010 - 2011

8.00%

2011 - 2012

8.60%

2012 - 2013

8.80%

2013 - 2014

8.70%

2014 - 2015

8.70%

2015 – 2016

8.70%

2016 – 2017

8.10%

How much do you have to contribute?

  • A fee of Rs. 100 is charged to open a PPF account.
  • A minimum of Rs. 500 has to be deposited in a fiscal to keep the account active; a maximum of Rs. 1.5 lakh is allowed in a financial year. 
  • Deposits can be made in one lump sum or in 12 installments.

Deposit mode

  • Cash
  • Demand Draft (DD)
  • Online transfer
  • Cheque (date of clearance taken as deposit date)

Default

  • On defaulting on payment the account can be revived by paying a fee of Rs. 50 and depositing minimum amount of Rs. 500 for every year defaulted.

Tax treatment

  • Deposits qualify for deduction from income tax under Section 80 C of IT Act.
  • Interest is completely tax free.

Withdrawal

  • Withdrawal is permissible every year from 7th financial year without the need to deposit it back. Up to 50% can be withdrawn of the balance on last financial year.
  • The withdrawal amount is limited to 50% of the balance at the end of the 4th year immediately preceding the year in which the amount is to be withdrawn, or the balance at the end of the preceding year, whichever is lower.
  • The withdrawals are not required to be paid back.
  • In case of extension for 5 year block after maturity a withdrawal of up to 60% (account balance at starting of block period) either in lump sum or staggered limited to once a year can be made.

Loan against your PPF account

  • Loan facility is available from 3rd financial year up to end of 6th financial year.
  • The loan amount is 25% of the balance in the end of the preceding financial year including interest.
  • The loan taken has to be paid in lump sum or two or more monthly installments within 36 months of taking the loan.
  • Interest is payable in not more than two installments.
  • The interest payable is 2% more than the interest rate on your PPF. For example today you can get a loan at an interest rate of 10.1% (8.1% +2%).

Attachment of a PPF account
  • PPF account cannot be attached under any court decree or the other order; hence it is safe and available for your family at any point of time.

Maturation
  • A PPF account matures on completion of 15 complete financial years from the end of the year in which the account was opened.

Extension

  • Account can be extended, after maturity, for any number of block periods of 5 years with further deposits.
  • The account can be retained indefinitely without further deposit after maturity with prevailing rate of interest. However if the five year block option is not exercised after within an year of maturity, they cannot opt for the next block of five years and no further deposits will be accepted. The account will continue to earn interest and withdrawal can be made once a year till accounts is closed.

New account

  • Another account cannot be opened after completion of 15 years if the earlier is not closed since there is already a facility of extension of account by block of 5 years. If the older account is closed only then the new account can be opened.

Premature closure

  • It is not allowed under normal circumstances, even after default on payments.
  • It is allowed in case of death of account holder on submitting proper documents and proofs relatives.
  • According to new rules under extraordinary circumstances such as education or serious ailment the account can be allowed to close with forgoing of 1% interest as penalty.


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Monday, 14 November 2016

Sukanya Samriddhi Account Scheme – Answers to all your questions

Sukanya Samriddhi Yojna is a project introduced by Prime Minister Narendra Modi to ensure carefree education and marriage expense of a girl child under “Beti Parao Beti Bachao Aabhiyan.”

It has a number of benefits over other small saving schemes:
  • The rate of interest is 8.5% per annum which is higher than most small savings schemes, only the EPF has a higher rate of interest at 8.75% per annum. 
 
  • The deposits made and interest earned is completely tax free in the hands of the beneficiary.
 
1. Eligibility- Who can enroll?
 
A girl child who is

  • An Indian citizen.
  • Is aged 10 or less on day of opening account.

Only one account for each girl child can be opened; up to two such accounts can be opened by      parents for two girls unless the second birth results in twin girls in which case a third account can be opened by a parent.

2. Where can the account be opened?

It can be opened in any public sector bank, government authorized bank or post office.

Given below is the list of banks which have been authorized to open and maintain Sukanya Samriddhi accounts:

  • Allahabad Bank
  • Andhra Bank
  • Axis Bank
  • Bank of Baroda
  • Bank of India
  • Bank of Maharashtra
  • Canara Bank
  • Central Bank of India
  • Corporation Bank
  • Dena Bank
  • ICICI Bank
  • IDBI Bank
  • Indian Bank
  • Indian Overseas Bank
  • Oriental Bank of Commerce
  • Punjab National Bank
  • Punjab & Sind Bank
  • State Bank of India
  • State Bank of Patiala
  • State Bank of Bikaner & Jaipur
  • State Bank of Travancore
  • State Bank of Hyderabad
  • State Bank of Mysore
  • Syndicate Bank
  • UCO Bank
  • Union Bank of India
  • United Bank of India
  • Vijaya Bank
The account is transferable anywhere in India. The account is also transferable between post office and banks at minimal fee, done not more than once a year.

3. What are the documents required?
  • Birth certificate of the child.
  • Photograph of both child and parent/guardian.
  • Address proof: Passport, Ration Card, Electricity Bill, Telephone Bill, Driving License, Aadhar.
  • Guardian/Parent’s ID: PAN card, Ration card, Driving License, Passport, Aadhar.
4.How much money do you have to deposit?

  • Minimum 1000/- and then multiples of 100 upto 1.5 lakh in a financial year can be deposited under the scheme.
  • The deposit can be made lumpsum or staggered in any no of time deposit.
  • The deposit can be made by cash/ DD/ net banking or ECS
  • If minimum deposit is not done in a year the account will be deemed default on payment, in such case account can be revived by paying Rs. 50/- and depositing minimum balance. If the account is not operated till 15 years after date of opening , then all deposit including those before   default date will earn interest rate equivalent to post office savings scheme, with only exception where the deposit was not made due death of guardian in which case the account will earn interest as regular SSY account.
5. How can one operate the account?

A passbook is generated at the time of account opening. It can be operated
  • Upto 10 years by guardian/parent.
  • After 10 years by child herself if she wishes so.
6. Tenure
  • Deposits under this scheme are to be made for the first 15 years from account opening date.
  • After 15 years no deposit will be made however the account will accumulate interest for the next 6 years and matures on completion of 21 years.

7. The interest rate
  • The interest rate is revised by the government every 3 months. The current rate of interest is 8.5%.
  • The interest rate is compounded annually.
  • Interest for a month is calculated on the lowest balance between close of 10th of the month and the end of the month.
I have created a calculator which will tell you the amount you can expect at the time of maturity. The calculator assumes that the interest rate will remain constant throughout the 21 year period. I am showing two examples of interest rate calculation of Sukanya Samriddhi account.

The first example assumes that I will deposit an amount of Rs. 50,000 at the beginning of each financial year (1-April) for 15 years.  The calculations show that at the end of the 21 year period this amount will grow to almost 25 lakhs (Rs. 2,49,8757) if the interest rate remains constant at 8.5% per annum.


In the second example I assume that you will be depositing Rs. 4000 per month. This amount will grow to Rs. 23 lakhs (2,312, 674) on maturity.

Have to check how much you will get if you invest a fixed amount every month or every year in your Sukanya Samriddhi account? Download the calculator and enter the rate of interest and contribution amount (per year or per month) to arrive at the maturity amount.

8. The withdrawal
  • 50% withdrawal is allowed on child passing 10th or attaining 18 years of age, whichever is earlier for purpose of higher study on production of fee slips or admission letter.
  • Certain cases may be allowed to withdraw prematurely on compassionate grounds such as illness etc. with proper documentation and reasons in writing.

9. Premature closure
  • Death of the account holder/ change in citizenship/marriage will  close  the account  from date of such change of status.
  • In any case the account cannot be closed before 5 years from date of opening. In extraordinary cases where it is unavoidable the account will only earn post office savings rate for the tenure.

10. The maturity
  • Maturity is at 21 completed years of account after which it ceases to earn interest.

11. Tax treatment
  • EEE
  • The deposit is exempt upto 1.5 lakh under 80c.
  • The maturity is tax exempt as is the interest earned during tenure.

Have any more questions? Type in your questions in the comments section below and I will answer them as soon as possible.
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Saturday, 5 November 2016

How is the EPF interest calculated?

In my blog titled "What you need to know about the Employee Provident Fund – EPF“ I have shared the basics of EPF. So how is the interest calculated on your Employees' Provident Fund account?

Every year, the EPF interest rate is decided by the central government in consultation with The Central Board of Trustees (CBT). The interest rate for FY 15-16 was 8.8% per annum.  The table below gives information about the interest rates declared on PF accumulations for the last 10 years.



Financial Year

Interest Rate

2006-07

8.50%

2007-08

8.50%

2008-09

8.50%

2009-10

8.50%

2010-11

9.50%

2011-12

8.25%

2012-13

8.50%

2013-14

8.75%

2014-15

8.75%

2015-16

8.80%

You can find the interest rates declared by the CBT since 1952 here.

An important thing to note is that the EPF accounting year (financial year) starts in March and ends in February. The interest is credited to your account in April.  The interest is calculated at the end of the financial year on monthly running balances basis.

The opening balance for a new  fiscal year (March 1)  would be the opening balance for the previous fiscal + monthly contribution throughout the year + interest (on the opening balance for the previous fiscal year & contribution in that fiscal year).

The table below explains how the calculation is carried out.  In the example I have assumed that the opening balance for the year to be 100,000. The employee contribution per month is Rs. 3600 while the employer contribution is Rs. 1101. The interest rate for the year is 8.8%.



Month no.

Employee Contribution

Employer Contribution

Opening Balance

Interest Earned

1

3600.00

1,101.00

100,000.00

733.33
(100000*8.8%/12)

2

3600.00

1,101.00

104,701.00

767.81
((100000+3600+1101)*8.8%/12)


3

3600.00

1,101.00

109,402.00

802.28
((104,701+3600+1101)*8.8%/12)

4

3600.00

1,101.00

114,103.00

836.76
((109,402+3600+1101)*8.8%/12)


5

3600.00

1,101.00

118,804.00

871.23
((114,103+3600+1101)*8.8%/12)


6

3600.00

1,101.00

123,505.00

905.70
((118,804+3600+1101)*8.8%/12)


7

3600.00

1,101.00

128,206.00

940.18
((123,505+3600+1101)*8.8%/12)

8

3600.00

1,101.00

132,907.00

974.65
((128,206+3600+1101)*8.8%/12)

9

3600.00

1,101.00

137,608.00

1,009.13
((132,907+3600+1101)*8.8%/12)

10

3600.00

1,101.00

142,309.00

1,043.60
((137,608+3600+1101)*8.8%/12)

11

3600.00

1,101.00

147,010.00

1,078.07
((142,309+3600+1101)*8.8%/12)

12

3600.00

1,101.00

151,711.00

1,112.55
((147,010+3600+1101)*8.8%/12)

13

3600.00

1,101.00

167,487.28 (Balance at the beginning of the next financial year calculated as mentioned above)

1,112.55
((151,711+3600+1101)*8.8%/12)

I have built an excel calculator that will help you to arrive at these calculations. The EPF interest calculator in excel can be downloaded here.

Using the EPF calculator
 

Enter the following data in the PF calculator. Your current age, your retirement age, current rate of interest (provident fund), current EPF balance if any, the amount that you contribute to your EPF and  the amount contributed by your employer.




The calculator shows your final savings in the EPF summary section.


As with any calculator, there are certain assumptions I have taken in order to arrive at the final saving information. Do not forget to take advice of a certified financial planner prior to taking action on the data contained in file.
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