Everything you need to know about Public Provident Fund (PPF)
Public Provident Fund (PPF) Scheme was started by Government of India in 1968 with the aim of promoting savings among Indian citizens. In order to incentivize the investor’s government has provided EEE tax status, where the investment made in PPF is nontaxable under section 80C, the interest income is also not taxable and the final corpus is also non-taxable.
The interest rate of PPF is revised quarterly by the government. Current interest rate under PPF is 7.8%.
Who can invest?
- Only Indian citizens can open a PPF account and cannot hold more than one PPF account.
- NRI’s are not eligible to open a PPF account. However, if a person opens a PPF account and later leaves the country and becomes NRI within the 15 years his account will be considered as closed from the date of leaving the country and will earn 4% interest on the investments made.
HUF (Hindu Undivided family) cannot open a PPF account, however, accounts opened prior to 13th May 2005 can be held and continue to invest until maturity without any extensions.
- PPF account needs a minimum age of 18 years to contribute but the account can also be opened on minors name with a contributing guardian (Father/Mother/legal guardian) above 18 years. However, the yearly maximum investment limit of only ₹1,50,000 will be a bracket limit for investments made together on Minors account and the guardian’s
- Any address Proof (like Passport, Aadhaar, telephone bill, electricity bill, ration card, driving license etc.)
- PAN Card (Serves as ID proof)
- Passport sized photograph
- Account opening form along with Nomination form
- For Minors, address proof and ID proof along with guardians should be submitted.
At the maturity, after 15 years PPF provides 3 options as depicted below.
- Complete withdrawal
After 15 years investor can withdraw the entire corpus of investment and interest accumulated. For example, if Investor had invested ₹ 1.5 lakhs per annum for 15 years and the total corpus is around 50 Lakhs (Principal + Interest). An investor can withdraw the entire sum of ₹50 lakhs.
- Extension without deposit
This will be the default option if the account is not closed after 15 years or applied for an extension with a further contribution. Here PPF will continue to earn interest for the corpus generated. This will be done for a block of 5 years. An investor can withdraw only once a year and there is no restriction on the amount that can be withdrawn. Any leftover amount will continue to earn interest. For example, if the corpus is ₹50 lakhs, investor withdraws ₹15 lakhs on 1st year. So remaining amount will continue to earn interest till withdrawn but the next withdrawal can be made only next year.
- Extension with extra deposit
Once the account matures, an investor needs to submit Form H within 1 year of maturity to extend the account for 5 years with a contribution every year. The regular contribution rules will be applicable. This option will not be as liquid as option 2, as you can withdraw only 60% of the corpus generated. For example, if the corpus is ₹50 lakhs investor can withdraw maximum ₹30 lakhs in the entire 5 years period. As in option 2, maximum withdrawal in a year is capped at once per annum.
As per PPF rules, every investor should contribute at least ₹500 per annum. If an investor doesn’t contribute a year then the account will become inactive. In order to reactivate an account, the investor has to pay a fine of 50 per year and minimum deposit for each year. During the inactive period, the account will not earn any interest, loans and pre-matured withdrawals cannot be availed. However, after 15 years the accrued amount can be withdrawn freely without any issues and account can be closed. For example if investor contributes for 10 years, if the account doesn’t have any contribution for 11th and 12th year during 13th year the investor has to deposit at least ₹1500 (minimum deposit amount for 11th, 12th and 13th year) and pay a penalty of ₹100 (50 per year for 2 years of inactivity) to reactivate it.
- An Investor can avail loans from 3rd financial year till 6th financial year.
- The maximum loan that can be availed is 25% of the corpus generated at the end of the previous financial year.
- The interest rate for the loan will be 2% higher than the prevailing PPF interest rate.
- For example, if the corpus generated at end of 4 years is 6 Lakhs, then the maximum loan that can be availed in 5th year is ₹ 1.5 lakhs. The interest rate will be 10.7% (assuming prevailing PPF deposit interest rate to be 8.7%). AT any point only one loan can be active. Any loan availed should be closed within 36 months from the month of loan availed. The repayment can be done in installments or one time. During repayment, the principal will be paid first then the interest. If there is no repayment in 3 years then the interest rate will be 6% above normal PPF deposit rate instead of 2% from the start of the loan for the 3 years.
- If principal alone is paid or only part of the interest is paid in 36 months then the remaining interest will be debited from the PPF corpus.
- Also, interest cannot be paid in more than 2 monthly installments.
Pre-mature withdrawals can be done only when account completes 6 years. The maximum withdrawal amount will be lowest of the 2 options noted below.
- 50 percent of the balance available at the end of the fourth year immediately preceding the year of withdrawal.Or
- 50 percent of the balance stood at the end of the preceding year.
If any outstanding loan is active then the loan amount will be subtracted from the eligible withdrawal amount.
For example, let’s look at the below table:
If the investor wants to withdraw on 9th year he will be able to withdraw the lowest of
Option 1 – ₹3.22 lakhs (i.e. 50% of₹ 6.45 lakhs) or
Option 2 – ₹5.84 lakhs (I.e. 50% of ₹11.69 Lakhs)
Hence the maximum withdrawal amount will be ₹3.5 Lakhs.
Premature closure is allowed only when account is at least 5 financial years old and satisfies any one of the below conditions
- The withdrawal is made to treat a serious ailment or life-threatening disease for investor or spouse of the investor or kids of the investor or parent or the investor.
- For higher education of the account holder or minor account holder
Please, note that investor should produce sufficient evidence for the above reasons and the interest rate will be 1% lesser than the normal interest rate for the entire tenure.
Advantages of PPF
- One of the best long-term debt saving scheme that offers better returns than FD, RD and etc.
- Virtually risk-free as it is backed by Govt of India.
- The scheme is classified as EEE tax status.
- The PPF funds cannot be attached to any credit default or court orders.
- Easy to open and access as it can be opened at any post office or bank.
Limitations of PPF
- Going by history, No equity exposure for long term will generate less corpus than an ELSS mutual fund investment for the same duration
- The liquidity is very less when compared to ELSS and other tax saving schemes.
- The maximum amount that can be invested is ₹1.5 Lakhs per year.
- The interest rate is comparatively lesser than EPF and VPF.
- PPF cannot be opened by HUF or trust and only individuals with Indian citizenship are eligible to open a PPF account.
- A joint account cannot be opened.
Some Interesting ways to use PPF
- Deposit your contributions before 5th of every month to get more interest. When you deposit after 5th of every month PPF will take your contributions for interest calculation from next month only.
- Even though post office has PPF facilities, it is better to open in banks so you can activate net banking and contribute via online mode.
- In case you face financial crunch and couldn’t make a deposit in a financial year (after 6 years of contribution), try to withdraw some amount using premature withdraw facility and reinvest them again so your account doesn’t go inactive and you save tax on your 80C Limits.
PPF is one of the least risky option under 80C investments. However, due to its declining return it is a better option to invest minimum amount in PPF and rest to be invested in ELSS mutual funds.
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