Everything You Need To Know For Foreclosing PPF Account.
Investment in Public Provident Fund (PPF) has always remained one of the most favorable investment instruments in India. However, with time the interest rate offered by the government of India has declined which has resulted in PPF becoming a relatively unfavorable investment instrument. In this article, we shall see how an individual can foreclose his/her PPF account but let us first start with features of PPF.
Features of PPF account
Interest paid in PPF account is determined by the government from time to time. The following chart shows the interest rate offered under PPF since 1986.Source: Government of India Press Release
The interest is compounded annually and is calculated based on the minimum balance available in the account from 5th of the month until the last date of the month.
With an aim to remove existing ambiguities due to multiple acts and to strengthen the objective of “Minimum Government, Maximum Governance, the government has proposed a merger of three acts namely the Government Savings Certificates Act, 1959, Public Provident Fund Act, 1968 and the Government Savings Banks Act, 1873. With a single act, provisions of the former acts would subsume in the new amended act without compromising on any of the functional provision of the existing act. The move is aimed to ensure highest priority is given to secure the interest of small savers particularly for the benefit of a girl child, senior citizens and regular saves who form the backbone of the country.
In the proposed new act, all existing protections have been retained and the primary objective of consolidation of multiple small savings act into one is to make implementation easier for the depositors by offering only one rulebook for various schemes. There has been no change in interest rate or taxation benefits available on small savings scheme through the amendment. Thus, apart from retaining existing benefits in the new act, the government has proposed new benefits under the bill. The additions are:
- The benefit of premature closure of small savings schemes is now introduced to deal with medical emergencies, higher education etc. which were not available previously.
- The provision to promote culture of savings among children which was previously not available
- Provisions have now been made for the operation of accounts in the name of physically infirm and differently abled persons which was previously not available under the three acts
- The amended act now allows the government to put in place mechanism for redressal of grievances and for settlement of disputes relating to small savings which were previously not available
- Investment in small savings scheme can now be made by the guardian also in case of minors which was not there previously
- More clarity is provided with regards to the role of guardian and nominee in case of death of any minor account holder
We believe the above provisions when incorporated in the new amended act will add to the operational flexibility of accounts under small savings scheme.
Premature Closure of Schemes
The government proposes to allow foreclosure of public provident fund (PPF) account even if the account in question has not completed five years. As per the current PPF act, a PPF account cannot be closed before the completion of 5 financial years, even if an individual is willing to do so. This rule has been withdrawn and the PPF account, now, may be closed provided the individual require funds for his/her children’s higher education or any medical treatment. Having said that, this flexibility is not free of cost, as this foreclosure would attract a penalty whereby the investor gets 1 percent less interest on all the preceding years.
Since the Interest rate in PPF has become unattractive, we believe that investors should use the partial withdrawal facility of PPF to use the amount for their immediate needs and to invest in mutual funds for better long term appreciation.
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