Public Provident Fund (PPF Account) | A popular saving scheme

Public Provident Fund (PPF Account) | A popular saving scheme

What is Public Provident Fund (PPF)?

Public Provident Fund is a popular and one of the best long term investment schemes with salaried as well as self-employed class of individuals in India. This scheme was introduced by the Ministry of Finance in the year 1968. 

It is offers risk free returns with attractive interest rate and interest earned on deposits are exempted from Tax. The deposits made in PPF accounts can be claimed as tax deductions. This makes the PPF Scheme one of the most tax efficient instruments.

Eligibility for opening PPF Account

1. Any resident Indian, 18 years or above can open a PPF account.

2. PPF account can be opened for minors under the guardianship of the parent.

3. NRIs cannot open a PPF account. If a resident Indian who opened a PPF account, subsequently becomes a NRI, his/her account shall be deemed to be closed with effect from the day he or she becomes a NRI.

4. HUFs are not eligible to open PPF accounts.

5. An individual cannot open joint account with another individual.

Also read: Best mutual funds SIP to invest in 2018

How to open a PPF Account?

PPF account can be opened at any nationalised, authorised bank and select post offices across India. PPF account can also be opened at specific private banks as well. PPF account in most of the banks can now be operated online. 

These accounts can be opened by filling a form, submitting the required documents and depositing the minimum pay-in at authorised branches. At any point of time, you are allowed to have only one PPF account in your name.

Documents required for opening PPF Account

Following documents are usually required for opening a PPF account:-

1. Account opening form.

2. Photograph (Passport size).

3. Identity proof (PAN card).

4. Residence proof.

Interest Rates for PPF Accounts

The Government announces the rate of interest for PPF account every quarter. The current rate of interest effective from 1/04/2020 on PPF account is fixed at 7.1%. The interest is compounded annually and is credited in the account at the end of financial year. Interest earned on amounts held in PPF accounts is tax-free.

Also read: 5 Best ELSS tax saving mutual funds to invest in 2020

Key Features of PPF Account

1. PPF account is the safest saving instrument available as it is backed by government of India.

2. The interest earned is tax free.

3. Any withdrawal from PPF account is exempted from Income Tax.

4. The investment in PPF up to Rs.1,50,000 can be claimed as deduction under 80C.

5. Long term investment of 15 years.

6. Rate of interest is better in comparison to other saving schemes available in the market.

7. An individual can open account with INR 100/- but has to deposit minimum of INR 500/- in a financial year and maximum INR 1,50,000.

8. Deposits can be made in lump-sum or in any number of installments during a financial year.

9. Loans can be availed from 3rd to 6th financial year.

10. PPF account cannot be attached under court order.

11. Partial withdrawals are permitted subject to certain ceiling limits from 7th financial year.

12. Account can be transferred from one branch/post office to another.

13. No age is prescribed for opening a PPF account.

14. Deposits are exempt from wealth tax.

15. More than one person nomination facility available.

Laon Facility on PPF Account

Any investor could take a loan on PPF deposit, subject to certain terms and conditions. Loan can be taken only between 3rd to 6th financial year. The maximum loan amount will be limited to 25% of the amount including interest that was present 2 years back preceding to the current loan date. 

The repayment period for such loan is 24 months. This loan can be paid in one lump-sum or in monthly installments. The rate of interest charged on the loan would be 1% more than the prevailing interest rate on PPF. 

No loan is allowed on discountinued or inactive accounts. A second loan could also be taken within the 3rd and 6th year, only if the first loan is fully repaid.

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Partial Withdrawals from PPF Account

Complete withdrawal of funds from a PPF account can be made only at maturity i.e. on completion of 15 years. However, partial withdrawals can be made from 7th year onwards subject to certain conditions. The amount that can be withdrawan in any year is minimum of (50% of the total balance at the end of the 4th year or 50% of the total balance at the end of the previous year). Only one partial withdrawal is allowed every financial year.

Premature Closure of PPF Account

Now you can close your PPF account before 15 years. Premature closure of PPF account would be allowed under certain circumstances such as serious ailment of the account holder, spouse, dependent children or parents, or for higher education for self or dependent children, or if a change in residency status of the PPF account holder. This is allowed if the account has completed five years. This shall be allowed with a penalty of 1% reduction in interest on the whole deposit. 

Inactivation and Reactivation of PPF Account

If a PPF account holder stop depositing the minimum amount of Rs. 500 for a year, the account will be inactive. The PPF account holder has to pay Rs. 500 for every year contribution and Rs. 50 as penalty to reactivate the PPF account. For example if you failed to contribute for 2 years then you have to pay Rs.1000 as 2 years contribution and Rs.100 as a penalty for 2 years.

Also read: Benefits of SIP | Advantages of SIP

On Death of PPF Account holder

Nomination facility is available for PPF account. In case of the death of the PPF account holder, the balance amount in his/her PPF account will be paid to the nominee even before the completion of 15 years. The nominee is not allowed to continue the PPF account by making fresh investment to it.

Extention of PPF Account after 15 years

The PPF accounts mature at the end of the 15th financial year, account holders have an option to extend the tenure. The tenure can be extended for one or more blocks of 5 years each on written request within 1 year from the date of maturity. There can be two types of extention:-

a) Extention without contribution - The balance in the account will continue to earn interest at the prevailing rates till the account is closed. Also, in this case, any amount can be withdrawan without any restrictions once every financial year. Here note that if the account is continued without contribution then you will not be allowed to make deposits again in your PPF account.

b) Extention with contribution - The account holder can make deposits as earlier. In this case, withdrawal is restricted to a maximum of 60% of the balance at the beginning of each extended period is allowed.

Limitation on PPF Account

1. Under PPF scheme, one person can only open one PPF account.

2. The subscriber can open another account in the name of minors but subject to maximum investment limit by adding balance in all accounts.

3. No interest on deposits of more than 1.5 lakh in a financial.

4. Joint accounts cannot be opened.

5. A deposit with a minimum amount of Rs.500 is mandatory in each financial year.

6. To revive the discontinued PPF account, you need to pay minimum deposit of Rs. 500 with default fee of Rs. 50 for each defaulted year.

7. Funds/accounts cannot be transferred between people.

Note: This post was originally published in May 2016 and has been updated for accuracy and comprehensiveness.

Also read: All about ELSS | Tax Saving Mutual Funds

Also read: NSC (National Saving Scheme)

Also read: Sukanya Samriddhi Account

Also read: SBI PPF Account | How to open PPF account in SBI?

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Public Provident Fund (PPF Account) | A popular saving scheme