Public Provident Fund (PPF)

ppf

In my earlier posts “Guide to Deductions u/s 80C” and “Tax Saving Investment Options”, I discussed briefly about PPF. In this post I will elaborate on what is PPF, its features which will help you in deciding whether utilise it to reach your financial goals or not.

So, what is PPF? PPF in an efficient tax-saving and wealth increasing scheme that was initiated in 1968, by the Ministry of Finance, Government of India to encourage domestic saving. It is one of the most tax efficient money saving schemes in India. Why? Because the deposits made towards PPF are eligible for deduction u/s 80C. The interest gained on the deposit is not taxable.

A PPF account can be opened at any nationalised, authorised bank and authorised bank branches and post offices. However, it can be opened at specific private banks only. For opening a PPF account relevant documents need to be submitted, and a minimum deposit amount needs to be paid.

Some of the key features of PPF scheme are:

  • Number of PPF Accounts eligible for opening: Only one account per subscriber can be opened.
  • Interest rates: Interest rates are set quarterly by the central government. The current interest rate is 7.9% p.a. The interest is compounded annually and credited at the end of the year. The interest rate is revised quarterly.
  • Tenure: The tenure is of 15 years, which can be extended for 5 years at every renewal. Depositors can also deposit more money, if they want, during the extended period.
  • Deposit amount: A minimum of Rs.500 and a maximum of Rs.1,50,000 can be deposited annually.
  • Deposit Frequency: Funds need to be deposited every year, otherwise the account will be rendered inactive. It can be re-activated by paying Rs.50 as penalty for each inactive year. Additionally, Rs.500 for each inactive year’s contribution will have to be deposited.
  • Deposit Mode: Deposits can be made via cash, cheque, PO, DD, online funds transfer; as a one-time deposit or up to 12 instalments.
  • Tax Advantages: As mentioned above, the deposits can be claimed as deductions u/s 80C. The interest earned and final amount are fully exempted from tax.
  • Renewal: The scheme can be renewed after the maturity period for a period of 5 years at a time.
  • Loan Facility: This scheme availing of loans against the deposited fund from 3rd year to 6th
  • Withdrawal: Complete withdrawal of funds is allowed only after maturity. However, funds can be withdrawn partially every year from year 7, subject to certain conditions.
  • Joint Account Facility: Not allowed.
  • Nomination: Nominees can be assigned during or after account creation. You can define your nominee to one or more persons and can also define shares to each nominee. In case death of account holder then the balance amount will be paid to his nominee or legal heir even before 15 years. Nominees or legal heirs are not eligible to continue the account of the deceased.
  • Account Transfer: PPF account can be transferred to other branches/ other banks or Post Offices upon the request of the subscriber.
  • Risk Level: PPF scheme invests in government bonds which are backed by the Government of India and thus, are considered the most secure investment. So investment in PPF is very safe.

Opening a PPF account has certain requirements and exclusions which are stated below:

  • Resident Indians, over 18 years of age, can open the PPF account, for themselves, or for anyone else in their family.
  • No upper age limit for opening the account
  • A PPF account can also be opened for a minor child or kid, below 18 years of age. In this case, the total PPF investments in the account of the minor, and guardian cannot exceed 1.5 lakhs, for a given financial year. Also, grandparents cannot open a PPF account for their grandchildren.
  • Non-Resident Indians cannot open a PPF account. Those NRIs who have opened a PPF account, before they obtained the NRI status can continue with the account investments until its maturity. But they can extend the account tenure after maturity, i.e. after 15 years.
  • The PPF account can no longer be opened by the HUF’s.
  • The restriction has been in place since the year 2015. Those who have opened the account before this period can continue with it until maturity. The HUF account will also not be extended after maturity.
  • People from their countries, or foreigners to India, cannot open the account.

So, is there any way to maximise the gains on PPF Account?

Yes. The best time to invest is between the 1st and the 5th of any month. Interest is calculated for the calendar month on the lowest balance in your account, between the close of the 5th day and the end of the month, and is credited at the end of every year.

So if money is not deposited on/before the 5th of a month, it doesn’t earn interest for that month. To maximise interest on the PPF account, it would be ideal to invest Rs. 1.5 lakh at one go at the beginning of the financial year (April-to-March year), i.e. on/before 5th of April every year. A one-time deposit will earn interest for the whole year.

PPF is one of the most tax-efficient investment avenues available in India. It provides EEE (Exempt-Exempt-Exempt) benefits.

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