Public Provident Fund or PPF is a common household name in India used by Individuals when it comes to tax saving. Still, a lot of people often confuse the PPF with the PF. The Provident Fund (PF) is meant for working people and is managed by the EPFO. Whereas a PPF account can be opened by anyone.
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What is PPF?
PPF is a long-term saving scheme started in 1968 by the National Savings Institute of Finance Ministry. It was started to encourage savings and investments among the citizens of India.
Since it is controlled by Central Government, it is considered one of the safest Investment options with assured returns and a higher rate of return as compared to Fixed Deposits, National Savings Certificate (NSC), Post Office Time Deposits, etc.
It also has added benefits in tax saving when compared to other investment options. This makes it an ideal investment choice for people with a low-risk appetite who are looking to invest in long-term plans.
Tax Benefits on PPF
As we know that in India one can avail the benefit of income tax exemption up to ₹1.5 lakhs of investment under section 80C i.e. if you invest in any scheme that is qualified for 80C deduction up to ₹1.5 lakhs, the amount is deducted from your net taxable income and thus you end up paying less tax.
Coming to PPF, it is an investment scheme that is eligible for 80C deductions, in which you can invest up to ₹1.5 lakhs and a maximum of ₹46,800/- can be saved in taxes. I will tell you how I arrived at this figure:
Suppose, you fall in the 30% tax bracket then the total tax saving on 1.5 lakh of investment under section 80C will be 30% of 1.5 lakhs + 4 % of the tax as cess which is (30/100*150000)*1.04=46800.
Had you not taken the benefit of 80C exemption, you would have ended up with only ₹1,03,200/- in your pocket out of this ₹1,50,000/- and paying the remaining ₹46,800 as tax. Bingo! You have not only saved taxes but will also earn interest on it without fear of losing your money.
Now there are many investment schemes eligible under 80C. So why chose PPF?
It is important to note that PPF is one of India’s very few investment schemes that are EEE in terms of tax treatment.
What does the EEE status mean?
EEE stands for Exempt, Exempt, Exempt. That means the PPF is exempt at the time of investment (subject to a maximum limit of ₹1.5 lakhs under section 80C). The interest income or the returns you get on this investment are tax-exempt. Also, the amount that you get on maturity is tax-exempt as well.
Is PPF a good investment option?
It is a very good investment option for low-risk appetite people looking for long-term investment. Since it is backed by the government, you get assured returns.
However, if you are investing to reach some economic goals, you can look for other investment options that give you better returns like Mutual Funds, Stocks, etc. Do remember that the risk also increases as the amount of returns increases.
Features you must know before investing in PPF
Return – The interest rate on PPF has varied between 4 to 12% since inception. However, in the last 15 years, it has always been more than 7%. The interest rate is decided by the central government quarterly and the current interest rate for Q1(April-June) 2021 for FY 2021-22 is 7.1%.
PPF interest rate is uniform for everyone including minors and senior citizens.
Investment Limit- You can invest any amount as low as ₹500/- to a maximum of ₹1,50,000/- every year in your PPF account.
When do you receive interest?
The interest amount is calculated every month based on the interest rate prevailing in that quarter. However, the interest for the entire year is credited to your account only at the end of that financial year i.e. on 31st March of every year.
How is interest calculated?
As said earlier, interest is calculated every month on the minimum amount available in your account between the 5th of the month to the last day of the month. So suppose, your account balance as of the 5th of a month is ₹100,000/-. Suppose you deposit ₹10,000 on the 10th of the month. You will earn interest only on ₹1,00,000/- for that month as the interest is earned on the minimum balance available between the 5th to last day of the month for that month. However, if you had deposited that sum of ₹10,000/- on say 2nd of the month, you could have earned interest on the entire ₹ 1,10,000/- for that month. So any deposit made after the 5th day of a month will not fetch you any interest for that month.
Immunity of PPF
PPF account cannot be attached by any person or entity in India to pay off any kind of debt or liability. It is immune even from a court order. This means that not even a court order or decree can force someone to pay off a liability from a PPF account. In short, a PPF account cannot be attached by even a court of law. However, an Income Tax Authority can attach a PPF account for the recovery of taxes or payment of any other dues from the subscriber.
How to invest in PPF?
PPF investments can be made monthly or quarterly or annually as per the individual’s choice. Investment can be made in a minimum of 1 or a maximum of 12 installments. For people who prefer to make a lumpsum investment, it is always better to invest at the beginning of the financial year so that interests on the investment can be earned for the entire year. For salaried people or others who prefer investing in installments can go for SIPs (Systematic Investment Plans). I must warn you here that SIP is meaningful only when investing in equities like mutual funds, stocks, etc. The SIP as an idea itself is based on the dollar-cost averaging (or rupee when applied in the Indian context) principle. However, we are not doing any averaging in the PPF. This is the reason why it is always advisable to invest as a lump sum at the beginning of the financial year if one can afford it.
What is the mode of the deposit for investing in PPF?
You can invest in PPF either by depositing cash in your bank, or cheque, or Demand Draft, or through online transfer of money in your PPF account.
Lock-In Period For PPF
The lock-in period of a PPF account is 15 years i.e. you cannot withdraw money from a PPF account for 15 years. However, there are certain exceptional circumstances.
This means for 15 years it is mandatory to invest at least the minimum amount i.e. ₹ 500/- in your PPF account. If you forget to invest in any year, your account becomes inactive. To activate your inactive account you must pay the minimum amount to regularize the investment plus ₹ 50/- as a penalty for each year of default.
So suppose you forgot to invest for 3 years, to re-activate your PPF account you need to pay the minimum amount for each year i.e. ₹ 500*3 = ₹ 1500 to regularize your default plus ₹ 50*3 = ₹ 150 as a penalty.
15 years means 15 complete financial years. For example, if someone opens a PPF account on 1st May 2020, the FY 2020-21 will not be counted in 15 years of the lock-in period. The lock-in period will only be counted from 1st April 2021 i.e. FY 2021-22.
Under what circumstances can I withdraw money from the PPF account prematurely?
The maturity period for a PPF account is 15 years. However, partial withdrawal is possible after the completion of the 6th year or from the 7th year under two circumstances.
- Medical emergency- When the subscriber or his family members have a medical emergency or are diagnosed with any critical illness.
- Children Higher Education- The subscriber can withdraw the money for the higher education of their children.
Under these circumstances, a subscriber can withdraw a maximum of 50% of the balance that was available in the PPF account at the end of the financial year that precedes the current year. Even the premature withdrawal is tax-exempt.
Can the PPF account be closed prematurely?
A PPF account can be closed prematurely only after the completion of 5 years. There are only two circumstances in which you can close the PPF account prematurely which is the same as premature withdrawal.
However, if the account is closed prematurely, the subscriber loses 1% of the interest returns for all the years. For example, if a subscriber owns a 10-year-old PPF account on which he had earned an average of 8% interest, he would lose 1% interest on all the 10 years as a penalty.
However, the subscriber is not penalized if he withdraws money prematurely.
Can You Increase the period of PPF investment?
Apart from 15 years i.e. Lock-in period, you can extend your investment period in blocks of 5 years. The extension can be made any number of times.
Application for extension needs to be made within 1 year of maturity of PPF account. If the subscriber fails to give an extension application, the account is extended automatically for 5 years and the subscriber will continue to gain interest on his invested money. However, no further investment is allowed in the extended period.
Loan Against PPF Account
A subscriber can even take a loan against his PPF account balance. The eligibility criteria for obtaining a loan are that the PPF account should be at least 3 years old.
The maximum amount of loan that can be taken is 25% of the balance available in the subscriber’s account at the end of the preceding financial year.
The interest rate on the loan is 2% above the interest that the subscriber would have received had he not take the loan i.e. (PPF rate+2)%. However, if the subscriber delays the repayment of installments, the interest rate can even go up to (PPF rate+6)%.
Opening a PPF account
Who can open a PPF account (Eligibility)-
- Any Indian Citizen above 18 years can open a PPF account.
- One person can open only one account. Multiple accounts are not allowed in any form.
- Apart from one account, a person can also open and operate a PPF account in the name of his minor children.
*However, the maximum investment limit remains 1,50,000/- for that person. This means he cannot invest ₹ 1,50,000 in his account and ₹ 1,50,000 in his minor child’s account. However, he can invest ₹ 1,00,000/- in his account and ₹ 50,000/- in his son’s account.
- NRIs cannot open a PPF account.
*Although NRIs cannot open a PPF account, if a person who was a citizen of India opens a PPF account and later becomes an NRI, will get all the benefits of a PPF account till its maturity period i.e. 15 years. He cannot extend the PPF account duration which is allowed for citizens in blocks of 5 years.
- HUFs cannot open a PPF account.
*A Hindu Undived Family (HUF) cannot open a PPF account but it can contribute to the account of its individual members.
- A PPF account cannot be held jointly.
- A PPF account can be transferred from one branch to another within the same bank (intra-bank) or from one bank to another bank (inter-bank).
Where can you open a PPF account?
Earlier PPF could only be opened at nationalized banks or Post offices. But now PPF accounts can be opened in any of the authorized banks, in the post offices, or online with authorized banks.
Documents Required
PPF account can be opened by paying a charge of ₹ 100/- along with the following documents:
- Account opening application form with details-Form A
- Identity Proof (Aadhar Card, PAN Card, or Passport)
- Address Proof with Current Address
- Signature Proof
- Passport Size photographs.
Nomination of PPF account
A subscriber can have one or multiple nominees for his PPF account. In the case of multiple nominees, a specific percentage of share has to be specified.
Parents, spouse, children, relatives, friends, etc., can be nominated by the subscriber.
Any change, cancellation, or alteration in nomination has to be notified by the subscriber in Form F.
If an account is held in the name of a minor child, the nomination cannot be made for that account.
Death of Subscriber
In case of the account holder’s death, the nominee must get the account transferred in his/her/their name. However, the nominees are not allowed to make any further contributions/investments in this account. If the amount is not withdrawn at the time of death, the account will continue to earn interest till maturity.
However, if the nominee chooses to close the account prematurely and withdraws the amount, no penalty is charged unlike when the subscriber himself closes the account prematurely as discussed earlier.
Important Forms
- Form A- Account Opening Form.
- Form B- To make Contribution or Deposit to PPF account.
- Form C- Form for Partial Withdrawal.
- Form D- To avail Loan against PPF account.
- Form E- To add a nominee by the subscriber.
- Form F-Change, Cancellation, and Alteration in nomination.
- Form G- For the claim of PPF.
- Form H- Extend the period of account.
Final Words
The Public Provident Fund (PPF) is a boon to many retail investors with a low-risk appetite. It has almost zero risks while fetching you a decent annual return on average. Just invest in a PPF account and let the power of compounding unleash its magic.