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Public Provident Fund

You reach your workplace and as is the ritual, you start combing through your inbox and spot that email from your employer - it is that time of the year when you have to declare your investments. Despite all the promises about being 'investment-wise' that you had made to yourself at the beginning of the year, you are lagging behind. You get to the task at hand and start looking for tax saving investments. The term 'Public Provident Fund' catches your attention. But what is a Public Provident Fund account, and how does one go about investing in it?

Here's everything you need to know about PPF and how it works.

1. PPF Interest Rate

The PPF interest rate is announced by the Finance Ministry of India and the same rate is applicable to all PPF accounts irrespective of whether your PPF account is held with a bank or a post office. The interest rate of PPF accounts is reviewed on a quarterly basis by the Government and is subject to periodic change. The current PPF interest rate is 7.1% p.a. which has remained unchanged since Q2 2020. The below table shows the historic changes in PPF Interest rates from Q1 2017 i.e. January to March 2017 onwards:

Period PPF Interest Rate (p.a.)
From Q2 2020 till date 7.1%
From Q3 2019 to Q1 2020 7.9%
From Q4 2018 to Q2 2019 8.0%
From Q1 2018 to Q3 2018 7.6%
From Q3 2017 to Q4 2017 7.8%
Q2 2017 7.9%
Q1 2017 8.0%

2. Who can open a PPF Account?

All Indian citizens are eligible to open and hold PPF accounts. You can only hold one account in your name or open a second account on behalf of a minor. A PPF account cannot be held jointly; it can only be held in the name of one person. Non-resident Indians (NRIs) and Hindu Undivided Families (HUFs) cannot open PPF accounts. However NRIs who had opened PPF accounts when they were resident Indians can continue to operate the account till maturity but they will not be allowed to seek extensions.

If you open an account in your name and in the name of your child, remember that the total amount you can invest (in both these accounts) during a financial year is ₹1.5 lakh only.

3. Important Features of PPF you Should Know

There are many important features of PPF that you should know about so that you can maximize your benefits when you invest.

  • Interest rates:

    The PPF(Public Provident Fund) interest rate is fixed by the Finance Ministry every quarter. The current PPF interest rate is 7.9%. And, though the interest is calculated every month, it gets credited to your account on 31st March every year. Also, the PPF interest is calculated on the minimum balance between the fifth and the last day of the month.

  • Here is an example:

    Say, you have a balance of ₹1 lakh in your PPF account on 30th April. Now, let's imagine you deposit ₹10,000 in your PPF account on 3rd May and ₹5,000 on 21st May. Now, the interest on your fund for the month of May will be calculated on ₹1.10 lakh and not ₹1.15 lakh.

  • Lock-in period:

    The minimum lock-in period of a Public Provident Fund(PPF) investment is 15 years. You can withdraw your entire corpus at the end of the 15th year. But if you wish to stay invested for a longer period, you can continue to do so (with or without making additional contributions). You can apply for extensions in 5 year blocks. There is no limit on how much time you can stay invested in the fund after the initial lock-in period of 15 years.

  • Deposit rules:

    You have to make at least one deposit per year for 15 years. The PPF minimum deposit is ₹500, while the maximum that can be invested in a financial year is ₹1.5 lakh. If you make any deposit in excess of ₹1.5 lakh in a financial year, the transaction will be automatically rejected. Until recently, the number of deposits was capped at 12. But now, you can make any number of deposits in multiples of ₹50 in a financial year. You can make deposits in PPF online, or by cash, cheque and demand draft.

  • Nomination facility:

    You can nominate more than one person. If you choose to nominate more than one person, you will need to mention the percentage of share; the shares of all nominees should add up to 100 per cent. Also, if the account has been opened on behalf of a minor, a nomination facility is not provided.

  • Loans against PPF account:

    An advantage of PPF accounts is that you can take a personal loan against the balance in your PPF account provided your PPF investment is not due for withdrawal. This loan can be availed between the third and the sixth financial year of opening the account. The loan amount is limited to 25% of the balance at the end of the second financial year prior to the year in which you applied for the loan. You are not required to pledge a collateral when taking a loan against your PPF account. The interest charged on the loan is 2% per annum. The principal has to be repaid first within 36 months starting from the first day of the month following the month in which the loan was taken. You can repay the principal in a lumpsum or in two or more monthly installments. You will then have to pay off the interest in two monthly installments or less starting from the first day of the month following the month in which the loan was taken till the last day of the month in which you have paid the last installment of the loan. In case of failure to repay the principal amount in 36 months, interest rate of 6% per annum will be charged, instead of 1% . If you have taken a loan against your PPF account, the balance does not earn any interest until the loan has been paid off. Also, you cannot take a second loan until the first loan has been cleared completely.

  • Attachment with debt:

    Public Provident Fund is regarded as a secure investment not only because it offers guaranteed returns but also because a PPF account cannot be attached to pay off debt or liability. This means, that no creditor be it an individual, entity or establishment can gain access to your PPF account funds to recover dues.

4. Tax Benefits of PPF

Investments up to ₹1.5 lakh are eligible for tax deductions under Section 80C. And since the maximum amount you can deposit in a PPF is ₹1.5 lakh per annum, it simply means that the entire amount can tax deductible (provided you have made no other investments under Section 80C).

You should also know that PPF investments fall under the Exempt-Exempt-Exempt (EEE) category. This means:

  • The amount you invest in PPF is exempt from tax
  • The interest you earn on PPF is exempt from tax
  • The final corpus at the time of withdrawal is also exempt from tax.

And if you are investing mainly for the purpose of tax saving, the EEE tax status helps. This is why the PPF scheme is considered a great tax saving option.

5. PPF Withdrawal Rules

At the time of withdrawal (after 15 years), you have three options:

  • Complete withdrawal:

    You can close your PPF account and withdraw your funds at the end of the 15th year. You will have to submit Form C to the post office or bank, where you have your PPF account, to terminate it.

  • PPF account extension without contributions:

    If you don't want to close your account, you can keep it active without making any further deposits for any amount of time. Interest will continue to be accrued on the balance till it is closed. You are allowed one withdrawal each financial year. There is no limit on the amount that you can withdraw though.

  • PPF account extension with contributions:

    In case you want to keep your account active and continue making contributions to it, you can also apply for an extension of your account in 5 years blocks. There is no limit on the number of times you can extend the duration of your PPF account in your lifetime. And after the 15th year, you can maintain the account with or without making investments. You will have to submit Form 15 H to extend the duration of your PPF account within one year of the maturity of your account. You are allowed one withdrawal each year during the extended tenure provided, in 5 years, and you can not withdraw more than 60 percent of the total balance reflecting at the beginning of the extension period.
    If you continue to make deposits without having submitted Form H, the deposits made after maturity will not earn any interest and neither will they qualify for deductions under Section 80C of the Income Tax Act.

6. PPF Withdrawal Rules Before Maturity

  • Premature withdrawals are allowed after the completion of five years from the end of the year in which the initial investment was made. That means, if you started your PPF account in Feb 2010, you can begin making partial withdrawals from the financial year 2015-16.
  • 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.
Year Investment amount (in ₹) Total corpus (In ₹)
2010 50,000 50,000
2011 50,000 1,00,000
2012 60,000 1,60,000
2013 80,000 2,40,000
2014 1,50,000 3,90,000
2015 90,000 4,80,000
2016 1,00,000 5,80,000
2017 1,10,000 6,90,000

You can withdraw 50% of the corpus at the end of the fourth financial year (FY2013) or the preceding year (FY2017); whichever amount is lower. As per the table:

  • Corpus at end of FY2013 is ₹2.40 lakh so 50% of that amount is ₹1.20 lakh
  • Corpus at the end of FY2017 is ₹6.90 lakh so 50% of that amount is ₹3.45 lakh.
  • This means you can withdraw ₹1.20 lakh in 2018.

7. Premature Closure

You can opt for the early closure of your PPF account only under certain circumstances; only if five years have elapsed since the opening of the account. To know when you can close your account prematurely, here are some specific grounds:

  • If the account holder, his/her spouse, parents, dependent children are afflicted with a life-threatening disease, the PPF account can be closed. Relevant supporting documents and medical reports must be submitted to verify the reasons.
  • If you need funds for higher education, you can opt for premature closure of your account. You will need to furnish relevant documents such as fee receipts and admission confirmation letters to substantiate the requirement.
  • If your residency status has changed, you can prematurely close your PPF account. To attest the change in residency status, you will need to provide a copy of your passport, visa or Income Tax Return.
  • In the case of premature closure of PPF accounts, the account holder receives 1% lower interest than the prevailing rate.

8. Public Provident Fund (PPF) Limitations

PPF accounts also come with a few drawbacks. Here is what you need to know:

  • PPF comes with a lock in period of 15 years. This is considerably longer than the lock-in period of other tax saving investments like Equity Linked Saving Scheme (just three years). This can be a big problem in case of an emergency or if you want to meet some financial requirements during the investment period. And while you do have the option to make premature withdrawals, there are lots of rules and regulations regarding when and how much you can withdraw (as we have already discussed). So, before investing in a PPF account, you will have to be sure that you can stay invested for 15 years.
  • Public Provident Fund interest rate is not very high; especially when you consider the fact that this is a long-term investment scheme. On the other hand ,ELSS has the potential to offer double-digit returns to investors.
  • PPF accounts cannot be held jointly - this can be a limitation if you want to open a joint account with your spouse or other family members.
  • The maximum amount that can be invested in a PPF account in a year is ₹1.5 lakh. On the other hand, there is no limit to the amount you can invest in other tax saving instruments like ELSS funds, NPS or FDs, although the maximum tax benefit that can be claimed is the same - ₹1.5 lakh under Section 80C.
  • Resident Indians can open new PPF accounts, but this feature is not extended to NRIs. For instance, if you had a PPF account as a resident Indian, but have become an NRI, you can continue to deposit into your account. However, you cannot open any fresh accounts.

9. Summary

If you are averse to high risk investments and want the security that is a characteristic of government-backed investment instruments, PPF can be a good option. But from a return point of view, ELSS and NPS fare better than PPF owing to the higher capital appreciation potential of equities. Opt for an ELSS fund if you are looking for a short-term tax-saving investment. And if your objective is to prepare a retirement corpus, then you can reap better rewards by investing in NPS.

10. Frequently Asked Questions (FAQs)

Can I withdraw PPF after five years?

Yes, you can make partial withdrawals from your PPF account after five years. However, the maximum amount you can withdraw 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.

Can I close my PPF account after 3 years?

No. You cannot close your PPF account after three years. Premature closures are only permitted after 5 years and under specific circumstances.

What happens to my PPF account after 15 years?

Your PPF account matures in 15 years. You can either withdraw the corpus or stay invested for an additional 5 years.

Can a person have two PPF accounts?

No. Only one PPF account per individual is allowed.

I deposited the money in my wife's PPF account. Who can avail tax deductions?

Only the account holder can claim tax benefits. In this case, only your wife is eligible to claim tax deductions.

Can I extend my account on maturity for two years?

No. You can seek extension only in blocks of five years after PPF maturity. There is no limit on the number of times you can seek an extension.

Is it mandatory to withdraw all the money from my PPF account at the end of 15 years?

No. It is not mandatory to withdraw the money from your PPF account at the time of maturity. The balance will continue to earn interest until it is closed.