We generally start learning about PPF (Public Provident Fund) after getting email from employer to declare the investment and this is when we start looking for tax saving investment. We have heard a lot about PPF and seen our parents investing in it. But what is a Public Provident Fund account, how does one go about investing in it, what are the advantages of investing in PPF and what is the interest rate on PPF? We have tried to explain and answer all of the above questions in below article.
What is PPF?
PPF refers to Public Provident Fund Account. The PPF scheme was started in 1968 by National Savings Institute of the Ministry of Finance to encourage saving and provide safest returns to its subscriber. As PPF is backed by the government of India, so risk is very minimal and it offers guaranteed risk-free returns to its subscriber. Any individual can invest in this scheme and earn handsome return on his investment as tax free. Return offered by PPF is higher than the return offered by banks on fixed deposit.
Investing in PPF allows you to earn interest on your money while also claiming tax deductions of up to 1.5 lakh under Section 80C of the Income Tax Act. For the longest period, PPF has been considered as a secure and popular tax-advantaged savings scheme. Thousands of Indians have used it to attain goals such as their children’s higher education, retirement fund and child’s marriage etc.
Who can open a PPF account?
All citizens of India can open and hold a PPF account. Each individual is allowed to open only one account and second account can be opened on behalf of minor. You are not allowed to hold PPF account jointly and it can be only held in name of one person. Non Resident Indians (NRI’s) and Hindu Undivided Families (HUFs) are not allowed to invest in Public Provident Fund. However, if someone opens a Public Provident Fund while he is a Resident of India but subsequently becomes a NRI, he shall be allowed to continue investing in his account till maturity and extension wont be allowed.
A PPF Account can be opened on behalf of a minor by either the father or the mother, but both of them are not allowed to open PPF account on behalf of the child. Grandparents are not permitted to create a public provident fund account on behalf of a minor. In the event that both parents die, the minor’s grandparents can serve as guardians and create an account on their behalf.
Public Provident Fund accounts can be opened at any Post Office and select authorised bank branches. Many people choose to have a PPF account at a bank rather than a post office because banks allow online deposits into your Public Provident Fund account whereas post offices do not.
It is important to note here that PPF Account is different from PF Account. PF Account is only for Salaried Employees that comes under the Employee Provident Fund Organisation (EPFO) whereas both Salaried as well as Self-Employed can invest in PPF Account.
Important features of PPF
There are so many important features of PPF that you should be aware of, so that you can maximize your benefits when you invest in PPF.
- Interest Rate : The Finance Ministry sets the interest rate on the PPF (Public Provident Fund) every quarter. The current rate of return on a PPF is 7.9 percent. And, though interest is computed monthly, it gets credited to your account on March 31st of each year. In addition, the PPF interest is calculated based on the minimum balance between the fifth and last day of the month.
How to earn maximum interest on PPF account – As previously stated, interest on PPF accounts is calculated monthly based on the lowest amount in your account between the 5th and the end of the month. As a result, if you do not deposit any extra funds into your PPF account by the 5th of the month, you will not earn any interest on such funds. In this situation, your lowest monthly balance would be on the 5th of the month, and any extra funds deposited after the 5th of the month would not earn you any interest.
As a result, it is always advised to make all extra deposits before the 5th of each month in order to receive the maximum interest rate on such additional money. The best way to earn the most interest on your PPF account is to deposit Rs. 1.5 lakh before April 5th, so that you can earn interest on the entire 1.5 lakh for the entire fiscal year. A one-time deposit at the start of the year will help you earn the most interest.
- Lock-in period : Public Provident Fund (PPF) investment have a minimum lock-in term of 15 years. At the end of the 15th year, you can withdraw your whole corpus. However, if you want to stay invested for a longer length of time, you can do so (with or without making additional contributions). Extensions are available in 5-year increments. After the initial lock-in period of 15 years, there is no time limit on how long you can continue invested in the fund.
- Deposit rules : You must make at least one deposit every year for 15 years. The lowest deposit for a PPF is Rs. 500, and the highest amount that may be deposited in a fiscal year is 1.5 lakh. If you deposit more than Rs. 1.5 lakh in a fiscal year, the transaction will be immediately rejected. Until recently, the number of deposits allowed was limited to 12. However, you can now make any amount of deposits in multiples of 50 within a fiscal year. PPF deposits can be made online, as well as via cash, check, or demand draft.
- Nomination facility : You have the option of nominating more than one person. If you choose to nominate more than one person, you must specify the percentage of share; the shares of all nominees add up to 100%. A nomination facility is also not available if the account is formed on behalf of a minor.
- Loans on PPF Account : Loans are available beginning with the third fiscal year, excluding the year of deposit. The amount of such loans cannot exceed 25% of the amount on the account holder’s credit at the end of the second year immediately preceding the year in which the loan is requested.
A new loan is not permitted if a prior loan or interest is still unpaid. If returned within 36 months, the interest rate is 2%; otherwise, the interest rate is 6% on the outstanding loan beyond 36 months. The payback can be done in whole or in instalments.
- Secure Investment : PPF is considered as a safe investment not only because it provides guaranteed profits, but also because a PPF account cannot be used to pay off debt or liability. This implies that no creditor, whether an individual, corporation, or establishment, may access the cash in your PPF account to recover dues.
Tax benefit of investing in PPF
The amount in the Public Provident Fund Account is made up of two parts: the money you put in this account, known as the Principal Amount, and the interest received on that amount.
Section 80C allows for tax deductions on investments up to Rs. 1.5 lakh. And, because the maximum amount you can deposit in a PPF is Rs. 1.5 lakh each year, the full amount is tax deductible (provided you have made no other investments under Section 80C).
You should also be aware that PPF investments are classified as Exempt-Exempt-Exempt (EEE). That means :
- The amount you invest in a PPF is tax-free.
- The interest you earn on your PPF is tax-free.
- The final maturity amount is tax-free at the time of withdrawal.
And, if you’re investing primarily to save money on taxes, the EEE tax status can help. As a result, the PPF investment is considered as one of the best tax-saving scheme.
Withdraw amount from PPF
At the time of withdrawal (after 15 years), you can mainly do any of the below three things:
- At the end of the 15th year, you can terminate your PPF account and withdraw your funds. To close your PPF account, you must submit Form C to the post office or bank where you hold PPF account.
- If you do not wish to terminate your account, you can keep it open for an indefinite period of time without making any further deposits. The balance will continue to earn interest until it is closed. Each fiscal year, you are permitted one withdrawal. However, there is no limit to the amount you can withdraw.
- If you wish to keep your account open and continue contributing to it, you can request for an account extension in 5-year block. There is no limit to how many times you may extend the term of your PPF account in your lifetime. After the 15th year, you can keep the account with or without investments. You need to submit Form 15 H within one year after the account’s maturity date. You are permitted one withdrawal each year during the 5-year extension term, and you cannot remove more than 60% of the total sum at the start of the extension term.
PPF Withdraw before Maturity
Premature withdrawals are permitted after five years from the end of the fiscal year in which the first investment was made. That implies that if you opened your PPF account in February 2015, you can start making partial withdrawals in the fiscal year 2020-21.
You cannot withdraw the entire amount from your PPF account. The amount is capped at the lower of the two – 50% of the balance at the end of the fourth financial year or 50% of the balance at the end of the preceding year.
Premature Closure of PPF account
You can close your PPF account early only in certain circumstances, only if five years have passed since the account was opened. Here are some specific grounds for closing your account prematurely:
- If the account holder, his or her spouse, parents, or dependant children are diagnosed with a terminal illness, the PPF account might be cancelled. To verify the reasons, relevant supporting documentation and medical reports must be presented.
- If you want cash for higher study, you might choose to close your account early. To justify the need, you must provide appropriate papers such as fee receipts and entrance confirmation letters.
- If your residency status has changed, you can close your PPF account early. A copy of your passport, visa, or Income Tax Return will be required to attest the change in residency status.
- If PPF account is prematurely closed, the account holder receives 1% less interest than the current rate.
Limitations of Public Provident Fund (PPF) Account
PPF accounts have a few downsides as well. Here’s what you should know :
- PPF has a lock-in period of 15 years. This is significantly longer than the lock-in period of other tax-saving investments such as the Equity Linked Saving Scheme (just three years), tax saving fixed deposit (5 years). This might be a major issue in the event of an emergency or if you need to meet certain financial obligations during the investing term. While you can make premature withdrawals, there are several laws and restrictions that govern when and how much you can remove (as we have already discussed). So, before you invest in a PPF account, you must be sure of staying invested for 15 years.
- The interest rate on the Public Provident Fund is not very high, especially given that this is a long-term investment programme. ELSS, on the other hand, has the potential to provide investors with double-digit returns.
- PPF accounts cannot be held jointly, which is a disadvantage if you wish to register a joint account with your spouse or other family members.
- A maximum of 1.5 lakh can be invested in a PPF account in a calendar year. However, there is no limit to the amount you can invest in other tax-saving vehicles like as ELSS funds, NPS, or FDs, though the maximum tax advantage available is the same Rs. 1.5 lakh under Section 80C.
PPF Account vs Tax Saving Fixed Deposit
Tax Saving Fixed Deposit is another Fixed Interest Earning Investment that may be claimed as a deduction under Section 80C. Section 80C allows a deduction for both Public Provident Fund and Tax Saving Fixed Deposits up to a maximum of Rs. 1.5 L each year.
The maturity of a Tax Saving FD is 5 years, but the maturity of a Public Provident Fund is 15 years. However, the income paid on a Tax Saving Fixed Deposit is taxable, as opposed to the interest earned on a PPF Account, which is tax-free.
PPF Account vs National Savings Certificate (NSC)
Both the Public Provident Fund and the National Savings Certificate (NSC) are government-backed and administered programmes in which deposits are made at the Post Office/specified banks. The main distinction between these two is that National Savings Certificates are one-time deposit schemes, but Public Provident Funds require you to contribute a minimum amount every year in order to keep the account alive.
The maturity length of a National Savings Certificate is similarly shorter, at 5/10 years, than that of a Public Provident Fund, which is 15 years.
PPF might be a suitable alternative if you are wary of high-risk investments but want the protection that comes with government-backed financial products. However, because of high appreciation potential of shares, ELSS and NPS outperform PPF in terms of return. If you want to save money on taxes in the near term, invest in an ELSS fund. And, if you want to build a retirement fund, investing in NPS will yield superior results.