What is Public Provident Fund (PPF)?
Public Provident Fund (PPF) is a long-term investment scheme in India that offers attractive returns with negligible risk and tax benefits. PPF scheme is an extremely sought-after investment option due to its numerous investor-friendly benefits. This allows investors to securely reserve a certain amount for future or unforeseen circumstances.
Table of Contents
- 1 What is Public Provident Fund (PPF)?
- 2 Brief History of Public Provident Fund
- 3 Features of Public Provident Fund
- 4 Eligibility Criteria for Public Provident Fund
- 5 How to Open a PPF account?
- 6 PPF Maturity Options
- 7 PPF Tax Concessions
Brief History of Public Provident Fund
Public Provident Fund (PPF) was introduced in the year 1968 by the National Savings Institute of the Ministry of Finance, the aim of PPF was to inculcate a habit of investments and savings among the public. The main purpose was to channelize savings safely and promote long-term investments at the same time.
It was for the benefit of small savers so that everyone could secure the future or life after retirement to be specific, without paying anything in taxes. Since 1968, the interest rates and the scheme has been amended regularly, the latest amendment being in December 2019.
Features of Public Provident Fund
Following are the features of public provident fund:
- Risk Free
- Higher Interest Rates
- Tax Benefit
- Investment Amount
- Mode of Deposit
- Opening Charge and Penalty
The risk is low or insignificant because it is backed up by Central Government. Also, an important point to be noted here is, in case of insolvency, all your personal assets are subject to the decree of court except PPF, which means the court can sell all your assets including stocks, mutual funds, etc. but not the PPF amount to pay off your debt.
Higher Interest Rates
The interest rates are compounded and higher than what the major banks offer on Fixed Deposits, and are revised quarterly. The interest rate as of the October-December 2021 quarter is 7.10%. You can receive maximum interest if the installment is duly paid before the 5th of every month.
The PPF investment model falls under the EEE category which stands for Exempt-Exempt-Exempt. This implies that all the deposits made in PPF are deductible under Section 80c of the Income Tax Act. In simple words, the deposits, accumulated amount, and interest are exempted from any tax deductions.
Being a long-term investment option, the amount has to be invested for a minimum period of 15 years. However, this can be further extended in the block of 5 years within a year of maturity.
The option of investing monthly or yearly is open to investors. The amount should be a minimum sum of ₹500 but should not exceed ₹150,000 per annum. That is, the amount can be paid a lump sum at the end of the year or through 12 installments in a year.
Mode of Deposit
The investment can be made online, offline, through cheque or cash, and even Demand Draft. Withdrawal One can withdraw the entire amount on maturity but if the withdrawal has to be made before maturity due to any reason, then the scheme allows partial withdrawal starting from the 7th year.
Opening Charge and Penalty
The PPF account can be opened by paying ₹100 as an opening fee. In case, the account holder was unable to invest in any one year during the 15 years tenure, the PPF account will stand deactivated. A penalty of ₹50 will be charged and no interest will be awarded for that period. The account will activate again once the investments start flowing in.
PPF also offers a loan facility to its investors. The amount has to be 25% of the second year, i.e. the immediate next year after submitting the loan application. The interest charges would be 2% more than what was being awarded. It can be taken in between the 3rd and 5th year and again after the 6th year if the previous one was fully repaid.
After, skimming through all the aspects of the Public Provident Fund, we can induce it is indeed a great, savings cum investment option.
Eligibility Criteria for Public Provident Fund
- Any individual Indian resident is eligible to open a PPF account.
- Every person is allowed just to have a single PPF account in their name. Nobody can hold multiple PPF accounts in different banks.
- A minor can also open a PPF account but it has to be operated by a guardian till he/she reaches the age of 18 years. A key point to be remembered here is, the yearly amount, in this case, can not exceed ₹150,000 combined in both the accounts, i.e, minor and guardian.
- NRI can not have a PPF account. Although, if the NRI status is attained after investing in PPF, then it can be operated for 15 years and can not be further extended.
- Hindu Undivided Families are not supposed to have a PPF account together but individual accounts for family members are permitted.
- There is no facility for Joint PPF accounts.
How to Open a PPF account?
There are two modes available to open PPF Account
How to open a PPF account online?
- Step 1: Open the official website of your bank.
- Step 2: In the services column look for the PPF account option.
- Step 3: Fill out the online form, KYC and attach the necessary documents required.
How to open a PPF account online?
- Step 1: Visit your nearest branch of the bank, in which you already have an account.
- Step 2: Ask for PPF form. Fill out Form A and KYC manually and submit it there, attaching the necessary documents.
- 2 passport size photographs
- Address proof
- ID proof (AADHAR CARD OR PAN)
PPF Maturity Options
At the end of the maturity period, the investors are left with three choices. Those options are:
- Complete withdrawal by Closing the account: After completion of 15 years, one can close the account and withdraw the entire amount along with the interest accumulated without having to pay anything in taxes.
- Extended account with contribution: In this option, one can extend the tenure at the time of maturity. If there is not an urgent need for that sum, a form can be filled and the fixed amount can be invested similarly in the extended block of five years. This extension can be taken any number of times.
- Extended account without contribution: In cases where people do not notify the bank or post office about extension or withdrawal it is assumed by the institution that the investment will be continued but without contribution. So you’ll only receive interest on the accumulated amount and there would not be any need to invest a sum from your end.
PPF Tax Concessions
As discussed earlier as per section 80C, the PPF model falls under the EEE category. This means, no tax to be levied on interest received, accumulated amount or withdrawals. However, this exemption is subject to a certain limit. The tax benefit is restricted to ₹150,000.
But, according to the latest official statement, investors would not have a choice to invest more than ₹150,000 in their accounts. The PPF account wouldn’t accept it and interest will not be calculated on the excess amount.