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Public Provident Fund (PPF): A Complete Guide

by | Jun 19, 2024 | Income Tax | 0 comments

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Important Keyword: PPF, PPF Features, Section 80C.

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.” This advice highlights the importance of long-term investment and regular savings in building wealth. One of the best options for safe and long-term investment in India is the Public Provident Fund (PPF).

The PPF is an excellent choice for individuals seeking a secure financial instrument that offers both tax savings and wealth growth. Since the PPF is supported by the government, it provides a high level of safety. Therefore, anyone looking to enjoy tax benefits while building a retirement fund should consider opening a PPF account.

What is a Public Provident Fund (PPF) Scheme?

The Public Provident Fund (PPF) scheme is a favored long-term savings option in India. It offers a blend of tax savings, secure returns, and high safety, making it an attractive investment for many.

History and Benefits

The PPF scheme was introduced in 1968 to encourage small savings by offering returns on these contributions. Notably, the interest and returns earned through PPF are exempt from income tax. Additionally, deposits made in a PPF account qualify for deductions under Section 80C of the Income Tax Act, offering significant tax benefits to investors.

How a Public Provident Fund Account Works
  1. Opening an Account:
    • A Public Provident Fund account can be opened by any adult for themselves or on behalf of a minor.
    • The investment lock-in period is 15 years, with the option to extend in 5-year blocks after maturity.
    • The minimum annual investment is INR 500, and the maximum is INR 1.5 lakh, either in lump sum or installments.
    • A minimum annual deposit of INR 500 is required to keep the account active. Failure to do so results in deactivation, which can be reversed by paying a INR 50 penalty along with the minimum deposit.
  2. Interest and Maturity:
    • The current interest rate is 7.1% per annum, compounded yearly.
    • After 15 years, the account can be extended with or without further contributions. If extended without contributions, interest is calculated on the existing balance.
  3. Deemed Extension:
    • If no closure application is submitted at maturity, the account is automatically extended for 5 more years.

Let’s Summarize PPF Scheme in the below table:

Minimum ContributionINR 500
Maximum ContributionINR 1.5 Lakh p.a.
Lock-in Period15 years
Interest Rate7.1% p.a.
Tax benefitTax deduction of up to INR 1.5 Lakhs u/s 80C
Key Features of Public Provident Fund
  1. Investment Limits:
    • Investments can be made in up to 12 installments or as a lump sum.
    • Payments can be made in cash or by cheque, with the date of realization being the account opening date.
  2. Account Tenure:
    • The initial maturity period is 15 years, extendable by 5-year blocks.
  3. Account Types:
    • Accounts can be opened for minors but not jointly.
    • Nominees can be added anytime, and accounts can be transferred between post offices.
  4. Withdrawal Rules:
    • Partial withdrawals are allowed from the 7th financial year onwards.
    • Premature closure is generally not permitted before 15 years, except in specific medical emergencies.
  5. Tax Benefits:
    • PPF falls under the EEE (Exempt-Exempt-Exempt) category, meaning deposits, interest, and withdrawals are all tax-free.
    • Deposits are deductible under Section 80C, up to INR 1.5 lakh per year.
Loan Facility
  • Loans can be availed from the 3rd financial year onwards.
Eligibility Criteria
  • Only Resident Indians can open PPF accounts.
  • NRIs and HUFs are not eligible, though accounts opened before changing residency status can be maintained until maturity but not extended.

Public Provident Fund Withdrawal Rules

At maturity (15 years), investors can withdraw the full amount. Partial withdrawals are allowed from the 7th year, with the maximum withdrawal being the lower of 50% of the balance at the end of the previous financial year or 50% of the balance at the end of the 4th financial year preceding the withdrawal year. Withdrawals require Form C, available from the bank or its website.

Tax Implications

PPF investments, returns, and withdrawals are fully tax-exempt. Deposits up to INR 1.5 lakh per financial year are deductible under Section 80C.

The PPF scheme remains a robust and reliable option for those looking to save for the long term while enjoying tax benefits and secure returns.

Loan Against PPF

The Public Provident Fund (PPF) scheme also provides an option to avail of loans against the PPF balance. Here’s what you need to know:

Loan Details
  1. Eligibility: Loans can be availed between the 3rd and 6th year after opening the PPF account.
  2. Loan Term: The maximum loan term is 3 years (36 months).
  3. Loan Amount: The loan can be up to 25% of the balance in the PPF account two years prior to the loan application.
  4. Second Loan: If the first loan is repaid fully, a second loan can be applied for before the 6th year.
Interest on Loan
  • Before 12th December 2019: Interest rate is 2%.
  • On or After 12th December 2019: Interest rate is 1%.
Drawbacks
  • Repayment Term: Must be repaid within 3 years.
  • Interest Suspension: The PPF account balance does not earn interest until the loan is fully repaid.
  • Penalty Interest: If the loan is not repaid within 3 years, the interest rate increases to 6%.
  • Outstanding Loan Interest: Unpaid or partially paid loans will have interest debited to the account holder’s account annually.

How to Open a PPF Account

PPF accounts can be opened through a post office or a nationalized/private bank like SBI, ICICI, HDFC, etc.

Online Application Requirements:
  • A savings account with the bank
  • Activated net banking and mobile banking
  • Aadhaar linked to the account
  • Mobile number linked to Aadhaar
Required Documents
  • Filled Form A
  • 2 passport-size photographs
  • Residence proof
  • KYC documents (Aadhaar, Driving license, PAN, etc.)
  • Signature proof
Step-by-Step Online Process:
  1. Login: Access the bank’s net banking portal or mobile banking app.
  2. Open PPF Account: Choose the option to open a PPF account.
  3. Select Account Type: Choose ‘Self Account’ or ‘Minor Account’.
  4. Fill Application: Enter necessary details, including nominee information, and verify documents.
  5. Deposit Amount: Decide on lump sum or periodic deposits.
  6. OTP Verification: Complete the process with OTP sent to the registered mobile number.

Once active, the account allows:

  • Online fund transfers
  • Standing instructions for regular deposits
  • Viewing account statements

Closure of PPF Account

Premature Closure

Accounts can be closed prematurely under specific conditions, with an application in Form-5:

  • Medical Treatment: For life-threatening diseases of the account holder or family.
  • Higher Education: For the account holder or dependent children, with proof of admission.
  • Change in Residency: Upon becoming an NRI, with relevant documents.
  • Note: Accounts cannot be closed before 5 years from the date of opening.
Closure Due to Death

In the event of the account holder’s death:

  • The nominee or legal heir must close the account.
  • Interest will be credited until the month preceding the balance payout.

This comprehensive overview of the PPF scheme highlights its benefits, the process of opening an account, loan facility, and closure rules, making it an appealing option for safe, long-term investment and savings.

Read More: National Savings Certificate (NSC)

Web Stories: National Savings Certificate (NSC)

Official Income Tax Return filing website: https://incometaxindia.gov.in/

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