Public Provident Fund

Public Provident Fund is a long-term, debt-oriented savings scheme with tax benefits. It was introduced by the National Savings Institute of the Ministry of Finance in 1968 to mobilize small savings and generate reasonable returns on them. Returns are in the form of interest which is compounded annually.  It is a product with a 15-year maturity period, extendable in blocks of 5 years. It is open to all Indian residents and eligible for tax exemptions. Non-Resident Indians are not eligible to open new PPF accounts, but they can continue their existing PPF accounts up to maturity. Minors can open PPF accounts too, through a guardian.

The objective of PPF is to provide citizens with a low risk option of investment with good returns that can contribute to their retirement savings as well as save tax. It is therefore a very popular product among ling term investors looking for a safe haven investment.

 

The biggest advantage of investing in PPF is that it generates attractive, tax-free returns. Interest rates for PPF are revised quarterly by the Ministry of Finance. Quarterly rates on PPF from the last 30 years are given below:

Period

Interest Rate

April 1986 – January 2000

12.0%

January 2000 – February 2001

11.0%

March 2001 – February 2002

9.5%

March 2002 – February 2003

9.0%

March 2003 – November 2011

8.0%

December 2011 – March 2012

8.6%

April 2012 – March 2013

8.8%

April 2013 – March 2016

8.7%

April 2016 – September 2016

8.1%

October 2016 – March 2017

8.0%

April 2017 – June 2017

7.9%

July 2017 – December 2017

7.8%

January 2018 – March 2018

7.6%

April 2018 – September 2018

7.6%

October 2018 – March 2019

8.0%

April 2019 – June 2019

8.0%

 

Features of PPF

  • The PPF is a scheme backed by the Government of India.
  • The PPF scheme can be opened and operated through Post Office and Nationalized banks.
  • It has a 15-year duration, extendable in blocks of 5 years.
  • The interest on PPF is quarterly revised by the Ministry of Finance and compounded annually.
  • The minimum and maximum deposit limits are₹500/- and ₹1,50,000/- respectively per year.
  • A minimum deposit of Rs.500/- in PPF is mandatory every year.
  • One can invest in PPF in lumpsum amount or through a maximum of 12 installments in a year and two installments in a month.
  • Failure to deposit minimum amount every year will render the account as discontinued, and such an account cannot be closed before maturity. However, it can be reactivated by paying ₹500 deposit and default fee of ₹50 for every defaulted year.
  • PPF deposits are tax exempt under section 80-C of Income Tax Act.
  • The interest earned on PPF is tax free.
  • The PPF account can be transferred from one Post office to another, from one bank to another and inter-branch, from Post office to Bank and vice versa.
  • One can assign a nominee for PPF account.
  • There is no provision for opening a joint PPF account.
  • One can open a PPF account even if they have a General Provident Fund.
  • PPF account cannot be operated via Power of Attorney.
  • Grandparents cannot open a PPF account on behalf of their minor grandchildren.
  • The total amount in two accounts held by a guardian, one for himself and the other on behalf of minor should not exceed Rs.1,50,000/-.
  • Premature withdrawal is allowed from the 7th year of onwards to the extent of 50% of the amount at the end of the fourth year or the fifth year, whichever is lower. Thereafter, one withdrawal per year is allowed.
  • PPF account cannot be continued by nominee or legal heir in case of death of the account holder.
  • The PPF can be retained even after maturity for any duration without any deposits. The interest will continue to accrue on the balance till the account is closed.
  • The balance amount in PPF account is not required to be set off against any debt or liability through any court order or decree.

 

Premature Withdrawal from PPF.

Complete withdrawal

PPF can be completely withdrawn after 5 years (Premature closure). But there are some conditions for this kind of withdrawal:

  1. Interest amount will be reduced by 1% of the actual interest rate. This amount will be recalculated based on this reduced rate during the maturity period.
  2. PPF can be closed only if the amount is required for the treatment of serious ailments or life-threatening disease of the account holder, spouse, dependent children or parents, or for higher education of the account holder or minor child of account holder.

Partial withdrawal

From 7th year onwards, one can make partial withdrawals from the PPF account. However, there are limits on the amount of money that can be withdrawn.

As per the PPF scheme rules, a person can withdraw lower of the following:

  1. a) 50 per cent of the balance available at the end of fourth year immediately preceding the year of withdrawal; or
  2. b) 50 per cent of the balance stood at the end of the preceding year

 

Drawbacks of PPF

                Although PPF has many takers due to its sovereign backing, guaranteed returns and tax advantages, there are certain drawbacks to the scheme. Firstly, PPF scheme lacks liquidity. Once investment is made in PPF, the money is locked for at least 6 years, except in cases of emergency. After that too only partial withdrawal is allowed. Thus, in case of any financial needs, one cannot depend on PPF money.

Secondly, investment in PPF cannot be done jointly with someone. Hindu Undivided Families (HUFs) and Trusts cannot invest in PPF too. NRIs also cannot make fresh investment in PPF. Thus, the eligibility for PPF is highly limited.

Thirdly, one cannot invest more than ₹1.5 lakhs per year in PPF. This limits one’s investment avenues and he has to then look for other options to invest over and above this amount.

FAQs

  1. How much can you invest in PPF?

You can invest minimum Rs. 500 to maximum Rs. 1,50,000 in PPF in one financial year.

 

  1. What are the tax advantages of investing in PPF?

PPF enjoys EEE status when it comes to tax. This means that PPF is exempt from tax on all its 3 components- a) initial investment, b) interest, c) maturity amount

 

  1. What are the other advantages of PPF?

Apart from tax benefits, there are other advantages of investing in PPF

  • You can get a loan against your PPF between 3rd to 6th financial year.
  • You can make partial withdrawals after 7th financial year of holding period.
  • Account can be extended in a block period of 5 years after maturity.

 

  1. What documents are required to open a PPF account?

Following documents are needed to open a PPF account

  • Nomination form
  • Copy of PAN card or Form 60-61
  • Form A or PPF account opening form
  • Photograph (passport size)
  • Residence and ID proof as per Know Your Customer (KYC) standards.

 

  1. How is interest calculated on PPF?

The interest rate in your PPF account is calculated on the lowest balance between the fifth and the last day of the month. Hence, to maximise your earnings, try making deposits between the 1st and the 5th of the month. Interest is compounded annually and credited on March 31 each year.

 

  1. Is it possible for individuals to transfer their PPF account to another person?

No, individuals cannot transfer their PPF account to another person. Similarly, nominees cannot continue the PPF account under their names in case the account holder has passed away.

 

  1. How many contributions can be made towards the PPF account in a month?

In a month, individuals can make up to two contributions towards the PPF account. The maximum number of contributions that can be made in a year is 12.

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Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns.

Please consider your specific investment requirements, risk tolerance, investment goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs.