The Public Provident Fund (PPF) offers a safe and tax-efficient investment option suitable for long-term financial planning. In this post we will comprehensively cover all the features of PPF that you need to be aware of.
The PPF is a 15 year deposit account that can be opened at a post office or a designated bank branch.
PPF deposits are tax deductible under section 80c and the interest is tax free as well.
The minimum annual PPF deposit is ₹ 500 and the maximum deposit is ₹ 1,50,000, paid either lump-sum or in upto 12 instalments.
The interest rate for PPF, as decided quarterly by the government, is currently at 8%
The Public Provident Fund (PPF) is a small saving scheme instituted by the government in 1968 to encourage regular savings and the creation of retirement corpus. It has the implicit guarantee of the government, helps save on taxes, and offers better returns as compared to fixed deposits. So it is important to understand how the PPF can add value to you investment portfolio.
In this post we will comprehensively cover all the features of PPF, so that you have all the information you need to assess the suitability of the PPF to your requirements.
Every individual who is an Indian resident is eligible to open a PPF account. A PPF account cannot be opened by an HUF or a trust. Multiple accounts for one individual are not permitted; nor are joint accounts. A PPF account can be opened in the name of one person only.
Account for a minor can be opened by only one guardian. However, one individual can open PPF accounts for multiple minors for whom she is the guardian. This is in addition to her own PPF account.
Non Resident Indians are not eligible to open a PPF account. However, if a resident who opened a PPF account subsequently becomes a non-resident before the maturity period, the account can continue until maturity.
Minimum and Maximum Contribution
Being a small savings scheme, PPF requires a minimum annual deposit of just ₹ 500. The maximum annual PPF deposit permitted is ₹ 1,50,000, including any deposit made on behalf of a minor. These limits are updated by the government from time to time.
The deposits can be made either lump-sum or in upto 12 instalments. There is no fixed amount for an instalment, and the value of one instalment can vary from that of another. There is also no restriction on how the instalments are spread over the year.
Interest rates on PPF (and other small saving schemes) are linked to the yields on government bonds, and are notified every quarter. For the quarter October to December 2018, the interest rate is 8%, compounded annually.
While the existing rate seems low when compared to the historical levels, it remains attractive vis-à-vis fixed deposits and other low-risk instruments, mainly owing to its favourable tax treatment.
￼The interest on PPF deposits is calculated every month. For interest calculation, the minimum balance between the 5th and the end of every month is considered. It is therefore advisable to make the deposit between the 1st and 5th of every month.
When it comes to reducing your tax liability, PPF is a great instrument to have in the portfolio. Being a long-term investment scheme, PPF falls under the Exempt-Exempt-Exempt (EEE) tax regime.
As livemint explains it, ". . . you don’t have to pay tax on part of the salary that equals the invested amount. Similarly, the second exempt implies that you don’t have to pay any tax on the returns earned during the accumulation phase. The third and final exempt means that your income from the investment would be tax-free in your hands at the time of withdrawal."
Tax on PPF deposit: The PPF contribution is eligible for deduction under section 80C of the Income Tax Act. Accordingly, it is important to remember that although section 80C allows upto ₹ 1,50,000 in deductions, it also includes other items like EPF contribution, life insurance premiums, ELSS investments, etc.
Tax on the accrued interest: The interest on the PPF deposits is tax-exempt under section 10(11) of the income tax act.
Tax on the maturity amount: The amount withdrawn from the PPF account and the amount received on maturity is tax-exempt.
Tenure of the PPF account
A PPF account matures at the expiry of 15 years, starting from the end of the financial year in which the account is opened. For example, if the account is opened on December 14, 2017, the account would mature on March 31, 2033.
Upon maturity the account holder can either choose to withdraw the maturity amount, including the accumulated interest, or extend the account with or without further contributions in blocks of 5 years.
Partial withdrawals: Partial withdrawals can be made from the beginning of the 7th financial year after the account is opened. Only one such withdrawal allowed every financial year. The maximum amount that can be withdrawn is the lower of following:
a. 50% of the account balance at the end of the preceding financial year.
b. 50% of the account balance at the end of the 4th financial year, counting back from the current year.
The PPF account can also be used to avail of a loan facility starting from the 3rd financial year upto the end of the 6th financial year after the account is opened. The interest rate on the loan is 2 percentage points higher than the prevailing interest rate on the PPF deposits. However, the loan amount is capped at 25% of the account balance of the second year preceding the loan application.
For example, for a loan at any point in FY 2017-18, 25% of the account balance on March 31, 2016 will be considered as the cap. The balance will be the closing inclusive of interest credited to your account on March 31.
Premature closure of the PPF account is not permitted under normal circumstances. However, if the account holder dies, the nominee or the legal heir can choose to close the account without any penalties. Premature closure is also permitted if the account has been active for at least 5 financial years, and any of the following circumstances apply (with relevant documentation for proof):
a. The amount is required for the treatment of serious, life-threatening ailments of the account holder or the immediate family
b. The amount is required for the purpose of higher education
While calculating the account balance for premature closure, the applicable interest rate is 1 percentage point lower than the rate applicable on the active PPF account.
Withdrawal of maturity amount: On maturity, the entire PPF amount, including interest can be withdrawn. As mentioned previously, the maturity amount is completely tax exempt.
Extension without contribution: If the account holder wants to continue the PPF account beyond maturity, but without further deposits, it could be done in blocks of 5 years each. There is no limit on how many times this could be done. The choice of account extension with or without contribution has to be made within one year from the date of maturity. In case if no choice is made, then extension without further deposits is the default selection.
If the account is extended without further deposits, withdrawals, without any limit, are permitted once a year. So potentially, the entire amount can be withdrawn anytime during the 5 year extension. During this period interest continues to be payable on the balance amount in the account.
Extension with contribution: As in the previous option, the account can again be extended in blocks of 5 years, but in this case with regular deposits. At the most 60% of the account balance as on the date of maturity can be withdrawn during this 5 year period, with one withdrawal permitted every year.
The Bottom Line
In our opinion, a combination of high safety, reasonable rate of return, and highly beneficial tax treatment make the PPF account a good addition to most financial plans.
Published on: September 5, 2018. Updated on: September 22, 2018