Public Provident Fund (PPF): A Complete Guide

Warren Buffett once said, ‘Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.’ Regular and systematic savings is the key to wealth creation. PPF – Public Provident Fund is a long-term investment option for investors searching for safe financial instruments. It comes with the dual benefit of tax saving and wealth accumulation. PPF is backed by the government and therefore scores high on safety. Hence, any individual looking for tax benefits along with accumulating retirement funds should open a PPF account.

What is a Public Provident Fund (PPF) Scheme?

PPF Scheme is a popular long-term savings scheme as it combines tax savings, returns & safety. The PPF scheme was initially implemented in 1968 to encourage small contributions and return on those contributions. The interest and returns earned under this scheme are not taxable under Income Tax Act. Moreover, the investor can claim the deduction under Section 80C of the Income Tax Act for the deposits in the PPF Account.

How does a PPF account work?

A PPF account can be opened by an adult for themself or on behalf of the minor. The lock-in period for PPF investment is 15 years. However at the maturity, one can extend the policy in the blocks of 5 years. The minimum investment is INR 500 and the maximum is INR 1.5 lakh per financial year. The contribution can be done in a lumpsum manner or on an installment basis. Further, the individual is mandatorily required to pay a minimum of INR 500 p.a. to keep the account in the active stage.

In case of failure of the minimum deposit in a financial year, the account will be deactivated and one will have to pay a penalty of INR 50 along with the minimum deposit of INR 500 for reactivating the account.

The interest rate applicable to PPF investment is 7.1% per financial year. Moreover, the investor has the option to continue with the account after the term has ended either with or without making new contributions. If no fresh deposits are made, interest will be calculated based on the prevailing balance at the end of the 15th year and if fresh deposits are made then interest will be calculated on the prevailing balance at the end of the 15th year plus the additional contribution.

Furthmore, if the investor does not submit an application for account closure on the maturity, it is deemed by default that the investor has intended to extend the policy for 5 more years.

Let’s Summarize PPF Scheme in the below table:

Features

The main features of PPF are mentioned below:

• Investment Limits: The investments can either be made in 12 installments or in lump-sum. The minimum number of installments in a year is 1 and the maximum number of installments cannot exceed 12.
• Mode of Payment: Investments can be made in cash or cheque. In the case of a cheque, the date of realization of a cheque in the Government account shall be the date of opening of an account.
• Tenure: The maturity period is 15 years but the same can be extended within one year of maturity for a further 5 years.
• Joint Accounts: An account can be opened for a minor as well. One condition for this is that the maximum investment limit should be the addition of balance in all accounts. There is no facility for opening a joint account.
• Nomination: A nominee can be added at any time i.e at the time of opening and also after the opening of an account. Further, the account can be transferred from one post office to another.
• Withdrawal Rules: A partial withdrawal facility can be availed from the 7th financial year onwards
• Closure of PF account: Premature closure is not allowed before 15 years i.e. you are not allowed to close your PPF account until it matures. However, it can be closed after 5 years of opening the account due to certain medical ailments that are life-threatening and affecting the investor or their family members.
• PPF account gives the benefit of a tax deduction on deposit, assured returns on investments, and tax-free withdrawal on maturity.
• A loan facility is available from the 3rd financial year from the year of opening the account.

Eligibility Criteria

• The investor has to be a Resident Indian.
• NRIs and HUFs are not eligible to open a PPF account. However, if a resident Indian changes their status to NRI after opening the account, they will still be able to maintain it in their name, and it will remain active until the account’s completion date. However, these accounts cannot be extended for a further five years, unlike in the case of Indian citizens. The same applies to HUFs.
• Parents or guardians can open PPF accounts on behalf of minor children.
• The guardian can also open an account for the person with an unsound mind.
• Opening multiple accounts (more than one) and joint accounts are not allowed under the PPF scheme.

What is the PPF Interest Rate?

Currently, the PPF interest rate is 7.1% p.a. and it is compounded every year. The interest is deposited into the investor’s account on 31st March every year and the PPF interest rate is set by Finance Ministry every year.

Calculation of PPF Interest Rate: The lowest balance between the end of the 5th day and the last day of every month is used to compute the interest rate.

PPF Withdrawal Rules

Once your PPF account reaches the maturity stage i.e., 15 years, the investor can freely withdraw the entire maturity sum. Hence, the total deposit amount along with interest will be transferred to the investor’s bank account after 15 years.

However, the policy allows partial withdrawal in case the investor is in immediate need of money. As per the PPF withdrawal rules, the investor can withdraw from the 7th year onwards i.e., the investor should have contributed till 6 years.

The maximum amount that can be withdrawn is lower of the following:

1. 50% of the account balance at the end of the financial year, preceding the year of withdrawal, or
2. 50% of the account balance at the end of the 4th financial year, preceding the year of withdrawal

For withdrawing funds from the Public Provident Fund, the investor needs to fill out Form C and submit the application to the relevant bank branch. The form can be obtained from the bank’s website or collected from the nearest branch.

Tax Implications on PPF

Investment under the public provident fund scheme falls under Exempt Exempt Exempt i.e., EEE category. This means that returns on the investment and interest (maturity amount) shall be fully exempt when the investor withdraws money.

Moreover, deposits under the PPF account can be claimed as deductions under Section 80C subject to the maximum contribution does not exceed INR 1.5 lakh.

The investor cannot close the PPF account prematurely. But the nominee can file a request for the closure of the account only in the case of demise of the account holder.

Tip

The investor cannot close the PPF account prematurely. But the nominee can file a request for the closure of the account only in the case of demise of the account holder.

Loan Against PPF

There is a facility for availing loans against the PPF investment. Below are the aspects one must learn before applying for a loan against PPF investment:

• The investor can avail of the loan between the 3rd and 6th year of opening the account.
• The maximum term of the loan can be 3 years i.e., 36 months.
• The loan amount can be up to 25% of the balance in the PPF account two years before the loan application is requested.
• If the first loan is fully repaid, one can apply for the 2nd loan before the 6th year begins.

Interest on Loan

As it is well known, interest and loans go hand in hand. If the loan is taken before 12th December 2019, the applicable interest rate will be 2%. If the loan is taken on or after 12th December 2019, the applicable interest rate will be 1%.

One must learn the following drawbacks before applying for a loan:

• The repayment term of the loan is 3 years i.e., 36 months.
• The PPF account balance does not earn any interest until the loan is fully repaid.
• If the loan is not fully repaid before 3 years (36 months), the interest rate will increase from the ongoing interest rate to 6%.
• The interest on outstanding loans which are not paid before the expiry of thirty-six months or paid partly shall be debited to the holder’s account at the end of each year.

How to Open a PPF Account?

You can open a PPF account through a Post office or even with a nationalized or private bank. SBI, ICICI, HDFC, etc are some of the banks offering PPF account opening facilities. You can open a PPF account either online through the bank site or offline by filing a ‘form A’ and submitting it. 

To make an online application via bank:

• You should have a savings account with the respective bank,
• You should have net banking and mobile banking activated,
• Aadhaar must be linked to the account, and
• Your mobile number should be linked to your Aadhaar. 

List of Documents required

• Duly filled Form A
• 2 Passport-size photographs
• Residence proof
• KYC documents like Aadhar, Driving license, PAN, etc.
• Signature proof

Step-by-step process to open a PPF account online:

Once the account is active, you can undertake the following activities:

• Transfer funds online from your linked savings account
• Set standing instructions for a deposit on a regular interval
• View account statement online

Closure of PPF account

Premature closure

An account holder will be allowed to close the account of themselves, the account of a minor, or the account of a person of unsound mind to whom they are guardian prematurely by making an application in Form-5 on any of the following reasons:

• For treatment of life life-threatening disease of the account holder, their spouse or dependent children or parents, by providing supporting documents and medical reports confirming such disease from treating medical authority;
• For higher education of the account holder, or dependent children by providing documents and fee bills in confirmation of admission in a recognized institute of higher education in India or abroad;
• Change in residency status of the account holder on production of the copy of Passport and visa or Income-tax return.

However, the account should not be closed before the end of 5 years from the date of opening an account.

Closure of account due to death

In the event of the death of the account holder, their nominee or legal hire will not be allowed to continue the account, the account should be closed mandatorily. Further, the interest will also be credited to the account till the end of the month preceding the month in which the balance amount of the fund is being paid to the nominee or legal hire.

FAQs