PPF or Public Provident Fund: All That You Need To Know

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PPF Scheme is quite popular among the investors or financial advisors for its flexible nature. Also, the tax benefits one can avail from a Public Provident Fund scheme make the plan lucrative.

To motivate small investments among the people, the Ministry of Finance, Govt. of India initiated Public Provident Fund in the year 1968. It is clearly mentioned in the Section 80C of Income Tax Act, 1961 that the interest earned during the PPF tenure is exempted from one’s tax liability. The PPF deposit up to 1.5 lakh is liable to the exemption and the amount to be received on maturity is also tax-free. Hence, PPF undoubtedly is one of the most tax efficient and popular money-saving schemes in India.

Avenues for Opening a PPF Account

You can open a PPF account at the nationalized public sector banks in India, at the post offices, and at other financial centers, like the private banks. You will have to submit the relevant and desired documents, the initial amount, and will also have to fill and submit the relevant form, for the purpose.

Interest Rate on PPF Deposits

The new budget announced by the Finance Minister substantially impacts the financial market. Various financial plans are affected and witness changes in terms of the rate of interest, service tax, return etc. PPF Scheme is also no exception. PPF interest rate is also dropped by 0.10% from 8.0% to 7.90%. It is the first time in its history since the inception of PPF that the rate of interest has gone below 8%.

The PPF interest rate 2016-17 towards a new deposit was 8.1%. It was 8.7 % in the financial year 2015-16. The interest rates for the PPF deposits are not like those of FDs or Fixed Deposits. While the fixed deposit interest rates do not vary, the interest rate for the PPF deposits varies for each consecutive year. All PPF deposits get the same interest rate benefits as per the new budget announcement. 

Defining the Financial Year

Financial year is the term that denotes the time period between the 1st of April of a given year, to 31st March of the successive year. The interest rate for the PPF scheme is announced in the budget session, every year, which will hold true for the next session that happens next year.

Type of Interest Accrued on the PPF Investments

The interest rate provided by the Government of India, towards the PPF accounts, is Compound Interest, and not simple interest. Compound interest (interest on interest!) is more fruitful for the investor, as each year the principal increases, and the interest is again calculated on the increased principal (in simple interest, the principal remains the same for each successive year).

Investment Amount/Monetary Deposit

The sole aim of the PPF scheme is to make Indians save more money, and hence all steps have been taken by the Government to ensure that the scheme is appealing to the general people. One can deposit a very low amount of money in the scheme.  

The individual can deposit a minimum amount of Rs 500 in the PPF scheme. The maximum limit of the deposit is now 1, 50, 000. The upper, or the maximum deposition limit has been increased very recently, from 1 lakh to 1.5 lakhs. An individual cannot deposit more than Rs 1.5 lacs to a given PPF account, in a year.  The increase is provided in order to make the scheme more lucrative to people.

Time Period

The PPF account of any given individual has a 15-year time span. The account is active for this duration. Its validity can also be extended, if the individual so desires, after successful completion of the time frame. The extension is for five years, at each renewal. Investors can also add more money to the account, if they wish, after extension.

Tax Exemption

Under the Section 80C of the Income Tax Act, an individual can get an exemption of up to Rs 1.5 Lakhs, for the PPF deposit.

Note: The individual can deposit the money in the name of self, child, or spouse.

Account Opening Charges         

The account opening charges for a PPF account is Rs 100. This one-time amount has to be paid by the investor, over and above the minimum amount of Rs 500, which would be the first deposit into the scheme.

Deposit Frequency

Each year, the investor has to submit the minimum amount of Rs 500 in the PPF account, in order to keep it active. The frequency has to be maintained for 15 years so that no year passes without a deposit.

There can be multiple deposits as well so that the total amount deposited during a given financial year does not crosses the Rs 1.5 Lakhs limit. An individual can deposit money to a PPF account, a maximum of 12 times, during a given financial/fiscal year. Also, No more than two deposits can be made to a PPF account, during any given month.

Ways of Depositing Money into your PPF account

There are an ample number of ways, through which an individual can deposit money to his account, or to the PPF account of somebody else, (including a child, spouse and member of the family).

These include PO or postal order, check, cash, and the online fund transfers. You can deposit money in a given PPF account for a maximum of 12 times, during a given financial year, via these means. These days, online fund transfer is a more convenient option to maintain your PPF account.

PPF Withdrawal: Partial and Full

You can make partial withdrawals from your PPF account, after a given number of years. Complete withdrawal can only be made from the account, after the completion of 15 years, or after maturity.

Features and Benefits

  • Partial withdrawals
  • Tax exemption
  • Compound interest given
  • Provision of extension after maturity
  • Multiple modes for depositing money
  • Invest as low as Rs 500
  • Secure and trustworthy, PPF being a government initiative
  • One of the best schemes for long term investments
  • Useful for planning for retirements, education, and marriage purposes, among others.
  • The policy amount is never available to the creditors, and cannot be attached to any court order.
  • Easy to access, as the PPF account opening facility is available at multiple venues, nationwide.
  • Scheme available at a number of banks, http://www.ppfaccount.in/list-of-banks-offering-ppf-account.html#,

Eligibility Requirements

  • Resident Indians, over 18 years of age, can open the PPF account, for themselves, or for anyone else in their family.
  • No upper age limit for opening the account
  • A PPF account can also be opened for a minor child or kid, below 18 years of age. In this case, the total PPF investments in the account of the minor, and guardian/minor cannot exceed 1.5 lakhs, for a given financial year. Also, grandparents cannot open a PPF account for their grandchildren.
  • An option to open the account online, wherever the bank offers the services.

Forms Associate with PPF

A number of forms are associated with the PPF account. This includes:

  • Form A: For opening the Public Provident Fund account.
  • Form B: To make a deposit into the account, or to repay the loan taken.
  • Form C: For obtaining partial withdrawals
  • Form D: To request a loan against the PPF account
  • Form E: For making a nominee
  • Form F: To make any change to the information related to the account
  • Form G: the claim the funds on the account, by a legal heir or a nominee

From H: To extend the time period of the PPF account, once its maturity has arrived.

How to Maximize the PPF Gains

For interest purposes, the bank considers the deposits made from 1st to 5th of any given month. Hence, to gain maximum interest, you should make a deposit before 5th of any given month.

Pros and Cons of PPF Scheme

PPF is one of the most appealing saving schemes, which has been gaining importance over the time. When PPF influences every walk of lives, it is recommended for all tax payers. A few of the appealing advantages of PPF are listed below:

The Safest Plan

PPF is initiated by the government, so there is no possibility of someone running away with your money. It is confirmed that you will get your assured amount at the time of maturity. So, investing in PPF is the safest decision.

Great Return

By investing in PPF, you can earn 7.9% interest per annum. But, because of the tax rebate facility, your actual return of 7.9% works out to be higher.

Compound Return

Scope to earn a compounded return. That means you not only earn interest for the deposit you have made but also earn interest on the interest earned as well.

No Tax on Interest Earned

The interest that you earn from a PPF account is exempted from the tax u/s 80C of the Income Tax Act, 1961.

Flexible Investment

You can invest up to a maximum of 1.5 lakh per annum towards your PPF account. The best part is that you can deposit the money in 12 installments. The minimum amount that you can invest is their PPF account is as minimum as INR 500.

No tax on Maturity Amount

The amount you get during the maturity of your PPF is also exempted from your tax lliability.

Online Maintenance

You can maintain a PPF account online as well. With internet banking booming, the use of online banking services has become convenient these days. You can maintain your PPF account by making deposits online, calculate your interest using PPF calculator online or keep yourself updated with every new announcement.

Free from Stock Market Influence

In PPF, your investment wouldn't be affected by stock market performance, as the investment is not exposed to equities. This is just opposite in case of mutual funds or SIPs. 

Disadvantages of PPF Scheme

Despite all the pros facilitated by PPF, it is not fully free of criticism. Public Provident Fund also has some cons that we can’t deny. To name a few:

Interest Rate is Unstable

The tend-to-change interest rate may affect the maturity amount. If we notice, the interest rate of PPF plan is not fixed. It kept changing over the time and is declining.

Lengthy Tenure

15 years is a long period, but the last contribution is made in the 16th financial year. You will not earn interest against the investment you have made on the last day of your account.

Interest on the Lowest Amount Only

The PPF rate of interest is calculated on the lowest balance between the 5th and last day of the month. For instance, you have 20,000 in your PPF account and you deposit an additional amount 2000 after 5th of a month, your interest will be calculated on INR 20,000 (not on INR 22,000).

Lacks in Liquidity

It is not same as mutual funds and is hereby lacking liquidity. Your money is stuck for years on end and not as easy as selling shares or units of mutual funds. 

So, PPF has also its shares of pros and cons equally, when compared to some other plans like FDs, ELSS mutual funds. However, it is one of the most preferable schemes until now due to its tax benefits. But it is always advisable to take experts’ advice whenever you are open to investing in a savings plan.

How to Reactivate the PPF Account Once It Is Inactive

The PPF account may get inactive, when you fail to deposit a minimum of Rs 500, in a given financial year, during the 15-year time frame of the account. In order to reactivate the account, you will have to pay a fine of Rs 50, for each year when the minimum deposit has not been made, into the account. Note that no loan, or interest, can be availed for the period during which the account has been inactive.

The account cannot be closed before the period of 15 years. Even if the account gets inactive, the amount (including the investment and the interest) is released to the account holder, or the nominee, only after 15 years i.e. on account maturity.

Online PPF Calculator

The online PPF Calculator is a versatile online financial tool, which helps you to:

  • Calculate the returns that you will get on your investments
  • Plan your investments, and invest towards a desired financial goal
  • Know your withdrawal limits

These and other benefits make the calculator an effective and popular online tool.

Exclusions

  • No joint account allowed
  • A maximum investment for a given financial year is Rs 1, 50, 000 lakhs only
  • Non-Resident Indians cannot open a PPF account. Those NRIs who have opened a PPF account, before they obtained the NRI status can continue with the account investments until its maturity. But they can extend the account tenure after maturity, i.e. after 15 years.
  • The PPF account can no longer be opened by the HUF’s.
  • The restriction has been in place since the year 2015. Those who have opened the account before this period can continue with it until maturity. The HUF account will also not be extended after maturity. 
  • People from their countries, or foreigners to India, cannot open the account. 

Documents Required to Open a PPF Account 

You will require an identity proof, signature proof, and an address proof for opening a PPF account. Any documents used should not be expired, and should be valid, as per the time references. 

Documents that can be used an Identity Proof and Address Proof

PAN Card, Passport, Aadhar Card, Voter’s ID, Driving License, Ration Card

Other documents that provide for the opening of a PPF account

Bank account statement, signed checks, employer’s letter, utility bills

Other than the identity and address proof, you would also require

  • Photographs
  • Duly filled account opening form. You can get the form at the bank or the post office where you wish to open the account.
  • Nomination form, if there are nominees.
  • For minor’s, an age proof will also be required.

The bank may also require any other/additional document.

PPF FAQ (Frequently Asked Questions)

Q1. Who is eligible to open a PPF account?

An individual can open PPF Account his/her own behalf.

Q2. What is the current interest rate on PPF Scheme?

As per the new financial year, the rate of interest on a PPF account is 7.90%.

Q3. What are the tax benefits I can avail from a PPF account?

Under Section 80D of the Income Tax Act, 1961, a maximum investment of INR 1, 50,000 is exempted from your tax liability, if you invest in PPF.

Q4. Is there any minor account available for my children?

Yes, one can open a PPF account for minor as well. The account will be maintained under the guardianship of the parents. The minimum and maximum limit will remain the same.

Q5. What are the maturity terms of a minor PPF account?

There are two conditions applied:

  • If the PPF matures before the child turns 18 years, then the parents can either withdraw the amount or extend it for another 5 years.
  • If the PPF matures after the child turns 18 years, then it is solely his/her decision whether to take out the money or not because now he/she is the sole holder of the account.

Q6. How is PPF interest calculated?

The PPF interest is calculated annually, on the lowest account balance between 5th and last day of the month. Hereby, it is advisable to deposit the money before 5th of the month so that you can earn the interest for that particular month. You can also calculate your PPF interest by using Policybazaar’s PPF Calculator Tool online.

Q7. Why is it important to have a PPF account?

The most important benefit of a PPF account is that one can get tax exemption benefit on this investment up to 1.5 lakh. The PPF Scheme comes under EEE tax range, which stands for-

  • Tax benefits up to 1.5 lakh
  • No tax on PPF interest earned
  • Maturity amount is also tax-free

Q8. What if my PPF account becomes dormant?

In case your PPF account is inactive, you are required to follow the below simple steps:

  • Submit a written application at a bank or post office where your PPF account is opened
  • A penalty charge of INR 50 is applicable for each year when the account is dormant
  • Get all the documents, penalty and signature verified by the bank officer in your presence
  • Try to maintain minimum INR 500 in your PPF account each year

Q9. What are the documents needed t o open a PPF account?

  • Age proof
  • Address proof
  • Identity proof
  • Income proof
  • Dully filled application form
  • Photographs
  • Age proof for minor
  • Documents may differ from bank to bank

Q10. Can I withdraw funds from my PPF account?

Yes, partial withdrawal is applicable. At the end of 6th year in the scheme, you can withdraw partially, i.e. up to 50% of the accumulated savings at the end of 4th year. Likewise, at the end of 7th year, you can withdraw up to 50% of the accumulated savings at the end of 5th year.

Q11. Can a PPF Account be transferred?

Yes, a PPF account can be transferred from one account office to another.

Q12. Where can I open a PPF account?

To open a PPF account, you can visit the nearest post office or a bank to open a PPF account with a deposit of as minimum as Rs. 500. Other than this, one can refer the below-mentioned list of banks that can help you open a PPF account:

  • ICICI Bank
  • Vijaya Bank
  • State Bank of India (and its subsidiaries)
  • UCO Bank
  • Punjab National Bank
  • Oriental Bank of Commerce
  • Allahabad Bank
  • Bank of Baroda
  • Indian Overseas Bank
  • Central Bank of India
  • Union Bank of India
  • Bank of Maharashtra
  • Canara Bank
  • IDBI Bank
  • Corporation Bank
  • Dena Bank
  • Indian Bank
  • United Bank of India
  • Axis Bank
  • Bank of India
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