All You Need To Know About PPF
Dec 19, 2017

Author: PersonalFN Content & Research Team

 

 

Introduction

The Public Provident Fund (PPF) scheme is one of the most popular investments in India today. And that is no surprise since it provides tax deductions, the maturity proceeds along with interest is exempt from tax, and it is a safe instrument which cannot be attached in case of debt or liability.

 

What is PPF?

Public Provident Fund (PPF) is a scheme of the Central Government, framed under the PPF Act of 1968. Briefly, PPF is a Government backed, long-term small savings scheme which was initially started by the Government in order to provide retirement security to self-employed individuals and workers in the unorganized sector. However, today, PPF is every Indian citizens’ darling investment avenue.

So if you are keen on a safe corpus, earning a decent tax-free rate of return, enjoying tax benefit; then PPF is for you. The contributions (i.e. investments) made to the PPF account, will earn a tax-free interest and the maturity proceeds are exempt from income-tax. But while you invest, have a long-term investment horizon; it can help you in retirement planning .

Keep in mind, you need to be disciplined to make the most of the PPF investments, and also meet your liquidity needs elsewhere; because under this investment avenue your money is blocked for good 15 years.

 

What are the main features of a PPF account?

The main features of the scheme are:

Eligibility Applicant needs to be a Resident Indian
Who cannot invest Hindu Undivided Family (HUF’s);

Non-resident Indians (NRIs); and 

Person of Foreign Origin
Entry Age No age is specified (Minor is allowed through guardian)
Can be opened at Any Post Office and some authorized branches of Banks
Mode of Payment Cash / Crossed Cheque / Demand Draft / Pay Order / Online Transfer in favour of the Accounts Officer
Nomination Nomination facility is available


*The current PPF interest rate is 7.80% p.a. as on October 1, 2017 which is subject to change. Note: The PPF interest rate is benchmarked against the 10-year G-Sec yield and is usually 0.25% higher than the average yield on G-Secs. The current PPF interest rate as on October 1, 2017 is set at 7.80%.

PPF
 

What are the benefits of having a PPF account?

E-E-E Tax status

Investments into your PPF account are deductible under Section 80C of the Income Tax Act, 1961 subject to the maximum permissible limit of Rs 1,50,000 in the financial year.

Moreover, the interest earned on the investment is completely exempt from tax. So, at the current rate of interest you earn tax-free return of 7.80% p.a.

Likewise, at maturity, the proceeds are exempt from tax.

Desirable investment avenue for Retirement Planning

With the lock-in of 15 years, PPF becomes a desirable tool for retirement planning whereby you earn compounded tax-free returns with capital protection. This makes it an ideal avenue to build your retirement corpus.   

Not attached to any claims

One of the best features of Public Provident Fund is that, the account cannot be attached to any claim in case of debt or liability. The money is yours for life. Even if you go bankrupt, this money can never be claimed by any creditor to repay a debt.

Simple Product and easily accessible

It is a simple tax saving product and can be accessed at nationalised, public sector banks, post offices and private banks. You can even open your PPF account online.

Tax_Benefits_of_PPF
 

How has interest rate on PPF changed over the years?

Period Interest Rate p.a.
01 Apr 1986 – 14 Jan 2000
12%
15 Jan 2000 – 28 Feb 2001
11%
01 Mar 2001 – 28 Feb 2002
9.50%
01 Mar 2002 – 28 Feb 2003
9.00%
01 Mar 2003 – 30 Nov 2011
8.00%
01 Dec 2011 – 31 Mar 2012
8.60%
01 Apr 2012 – 31 Mar 2013
8.80%
01 Apr 2013 – 31 Mar 2016
8.70%
01 Apr 2016 –  30 Sep 2016
8.10%
01 Oct 2016 – 31 Mar 2017
8.00%
01 Apr 2017 – 30 Jun 2017
7.90%
01 Jul 2017 – 30 Sep 2017
7.80%


Please note that the interest rate on PPF is benchmarked against the 10-year G-Sec yield and is usually 0.25% higher than the average yield on G-Secs.

Use our PPF Calculator to calculate returns earned, your eligibility for loan against PPF and Withdrawal limits on your PPF Account.

 

How do I open a PPF account?

You can open a PPF account at any post office and some authorized branches of nationalised and private banks.

Documents required for opening a PPF account

All you got to do is submit an:

  1. Application Form
  2. Proof of identity
  3. Proof of address
  4. Couple of passport size photographs

Once your formalities are completed, you will receive a pass book which will record all your PPF transactions.
 

What are the different forms used for operating my PPF Account?

PPF Forms Description
Form A To open a Public Provident Fund Account (PPF Account)
Form B To make deposits into a PPF account
Form C To make  withdrawals from a PPF account
Form D To request a loan against a PPF account
Form E To add a nominee to a PPF account
Form F To make any change in nomination of PPF account
Form G To claim funds in the event of the PPF account holder by a nominee/legal heir
Form H To make PPF account extension at the time of maturity

 

What do I need to keep in mind while making deposits into my PPF account?

  • You can invest in multiples of Rs 5 with a minimum investment of Rs 500 per annum, and a maximum of Rs 1,50,000 per annum.
     
  • Any amount invested above Rs 1,50,000 will not earn any interest and will not be eligible for deduction u/s 80C of the Income Tax Act, 1961.
     
  • You can invest into your PPF the same way you would invest by way of a Systematic Investment Plan (SIP), i.e. by making up to 12 instalments in a year of different amounts, but not more than 12 investments in a year.
      
  • Interest will be calculated on the minimum balance in your account between the 5th and the last day of every month. So if you were planning on investing into it monthly, make sure you invest on or before the 5th of every month.

Can I take a loan against my PPF account?

Yes, you can take a loan from the fund in case a need arises.         

The PPF rulebook states: “Notwithstanding the provisions of paragraph 9, any time after the expiry of one year from the end of the year in which the initial subscription was made but before expiry of five years from the end of the year in which the initial subscription was made, a subscriber may, he so desires, apply in Form D or as near thereto as possible, together with his pass book to the Accounts Office for obtaining loan…”

Therefore, to simply put, from the second year of opening the PPF account to the sixth year, as a PPF account holder you can take a loan against the account.
 

How much loan can be availed against the PPF account?

“… A subscriber may, he so desires, apply in Form D or as near thereto as possible, together with his pass book to the Accounts Office for obtaining loan consisting of a sum of whole rupees not exceeding twenty five per cent of amount that stood to his credit at the ends of the second year immediately preceding the year in which the loan is applied for”, states the PPF rulebook.

At the end of second year preceding the year in which loan is applied, one can apply for upto 25% of that balance, rounded to the nearest whole rupee.

For instance, for a loan in June 2017, the financial year of loan application is FY 2017-18. The second year preceding this year is 2015-16. You can take a loan of up to 25% of the balance standing to her credit at the end of this FY 15-16.

Below is Mr A’s acount statement:



Financial Year
Year-end Balance Eligibility Amount eligible
2015-16
1,50,000
No
Nil
2016-17
2,00,000
No
Nil
2017-18
3,50,000
Yes
37,500 (25% of 1,50,000)
2018-19
4,50,000
Yes
50,000 (25% of 2,00,000)
2019-20
5,00,000
Yes
87,500 (25% of 3,50,000)
2020-21
5,20,000
Yes
1,12,500 (25% of 4,50,000)
After 2021 till Maturity
No
Nil


Now in this case, he is is eligible for a loan amount of upto Rs 37,500 during 2017-18, Rs 50,000 in the year 2018-19 and so on.

Now let us look at questions commonly asked about Loan against PPF Account:

What about the repayment of loan against PPF account?

The loan needs to be repaid with interest at 2% per annum within 36 months, either in lump-sum or in instalments. If the principal is fully repaid, the balance for the interest should be defrayed in two monthly instalments.

In case you fail to repay after 36 months, penalty will be charged at the rate of 6% over your PPF rate. So, with the current rate of interest of 7.8% on PPF, the loan repayments after a period of 36 months will cost you 13.8% p.a. on your loan amount —which is very close to the rate charged on personal loans.

Further, if you fail to repay your interest entirely in next two months post the end of your loan term then the same will be deducted from your PPF account balance.

Is a second loan against PPF account possible?

Yes, you can take a second loan against your PPF account before the end of your sixth financial year, but the second loan can be taken only once you’ve fully settled your first loan.

Please note the PPF money is technically illiquid until the 7th year of your account opening; meaning, you can’t ‘withdraw’. Only starting from your seventh year you’re eligible for partial withdrawals (vide application in Form C) every year. But before that, you can avail for loan against your PPF balance.

Remember,

  • You can apply for a loan only once in any particular financial year.
  • You will be ineligible for the loan if the minimum mandatory investment/contribution of Rs 500 towards the PPF account was not made in past.

 

Can I make withdrawals from my PPF account?

Any time after the expiry of the 5th year from the date that the initial subscription is made, you become eligible for withdrawals. But withdrawal amount should not be more than 50% of the previous year’s balance or of the 4th year immediately preceding the year of withdrawal, whichever is less. If you have taken any loan on your PPF, this also gets factored in and reduces your balance. You cannot make more than a single withdrawal in the year.

You need to apply with Form C for any withdrawals.

The amount of withdrawal will be limited to 50% of the balance at credit at the end of the fourth year immediately preceding the year in which the amount is to be withdrawn, or the balance at the end of the preceding year, whichever is lower, as per the PPF rulebook.

Thereafter, you can make one withdrawal per year. The withdrawal amounts are not repayable. So, for example, if you opened your PPF account on April 1, 2014, you can make your first withdrawal after April 1, 2020, and the amount of withdrawal will be limited to 50% of the balance as on - March 31, 2016, or the balance as on - March 31, 2019, whichever is lower; subject to loan taken on your PPF account.

It is important to note that; if you have taken any loan on your PPF account (which is possible!), this also gets factored in and reduces your balance.

 

What are my options on PPF account maturity?

Once your account matures, you have 3 choices:

1.Withdraw the maturity amount

If you decide to withdraw your money, the maturity value is exempt from tax.

2.Extend your account by a block of 5 years with fresh contributions
 

  • If you decide to extend your account and continue making fresh contributions, you can extend it for a block of 5 years at a time, as many times as you want.
     
  • You can also make withdrawals from the account, up to 60% of the account balance that was there at the beginning of the extended period. So, your PPF account can act as an important source of inflow during your retirement years.
     
  • Just remember, if you choose to extend your account, submit the necessary documentation i.e. Form H, for extension within one year from the maturity date.
     

3.Extend the account without making any further contributions

  • If you choose this option, you would continue to earn PPF interest on the balance public provident fund account.
     
  • You are also permitted to withdraw without any restrictions; however, you can withdraw only once per year. The balance will continue to earn PPF interest until it is withdrawn.

On withdrawal, the PPF proceeds can be used to fund your life goals, such as your retirement, children's higher education or marriage and so on.

 

16 questions commonly asked about Public Provident Fund (PPF)

  1. Can I have more than 1 PPF account?

    At any point in your life, you are allowed to have only 1 Public Provident Fund account in your name.
     
  2. Can a minor open a PPF account?

    You can have an account in the name of a minor child of whom you are the parent / guardian. However, please remember that this will be the child’s account and you will simply be the guardian.
     
  3. Can I have a Joint PPF Account?

    No, you can never have a joint PPF account.

    And if at any time it is seen that you have more than 1 account in your own name, the second account will be deactivated, and only your principal will be returned to you.
     
  4. What happens if I forget to invest one year?

    Your account is considered de-activated. In order to re-activate your account, you need to pay a fine of Rs 50 for each year that you have not made any subscription, and also make a minimum subscription of Rs 500 for each year that you have missed. Only then your account will be reactivated and you will start earning interest again.
     
  5. How can I close my PPF account?

    You can close the account after completion of 15 years or the expiry of 15 years from the close of the financial year in which the initial subscription was made.

    The whole amount in this account can be withdrawn at the time of closure. For closure of account, you should apply in ‘Form C’ along with the Pass book of your PPF account.
     
  6. What happens on the death of account holder?

    In case of death of the account holder, the balance amount in the account of the deceased account holder will be paid to his nominee or legal heir, as the case may be, even before expiry of 15 years. The nominee or legal heir cannot continue the account by making fresh subscriptions to it.

    If the balance in the amount is more than Rs 1 lakh, then the legal heir or nominee has to prove identity and provide the relevant documentation to claim the amount in the PPF account.
     
  7. How can I transfer my PPF account?

    Your PPF account can be transferred at the request from one office of your bank/post office or its associates to the Head Post Office or vice versa. However, a PPF account cannot be transferred from one person to another.
     
  8. Can NRIs open a PPF Account?

    No, Non Resident Indians are not eligible to open an account under the PPF Scheme. But there is a silver lining for some NRIs. If you already had a PPF account, when you were resident in India, and during the 15 year tenure of the PPF account you became an NRI, then you are eligible to continue investing in the account until it matures, but on a non-repatriable basis.
     
  9. Can HUFs open a PPF Account?

    No, HUFs, cannot open new PPF acounts as the PPF rules have been modified with effect from May 2005. It says, “…which it was conveyed that existing PPF accounts opened in the name of HUF would continue till maturity and enjoy all facilities available under earlier rules, but their maturity period cannot be extended further after 13.5.2005.

    So, existing HUF PPF accounts will continue to operate normally until maturity, but unfortunately cannot be extended beyond maturity, and no new HUF PPF accounts can be opened.
     
  10. Can I appoint a nominee for my PPF Account?

    It’s very important to ensure that you have a nominee on your PPF account, who in the event of your death will receive the PPF corpus. You can nominate one or more persons to receive the amount standing to your credit in the event of your death. Use Form E to make initial nominations, and if you wish to later change them, use Form F
     
  11. Is it true that if I open an account in my minor child’s name and I also have my own PPF account, then I am only eligible for Rs 1.5 lakh exemption totally for both accounts?

      Yes, this is true. Considering that your child is a minor, you as the parent / guardian are not entitled to dual exemption of up to Rs 3 lakh. The exemption limit remains at Rs 1.5 lakh together for both the accounts.
     
  12. Can grand-parents open PPF Account for their grand-children?

    No, grand-parents cannot open PPF Account in their grand-children’s name. You can give the money to their parents/guardian and get the account opened. But in case both the parents die then grand-parents can open the PPF account for minor children and operate as a guardian.
     
  13. Will I earn interest on my account if I extend the maturity period of my PPF account beyond 15 years?

    Yes, you will earn interest at the prevailing interest rates during the extension period. You earn interest irrespective of whether you make further deposits or not. If you do not make fresh investments then you can earninterest on the account balance held at the end of the 15th year. And if fresh investments are made during the extension period then, it will be added to your account balance. Interest is calculated on this new amount.
     
  14. What if I deposit more than Rs 1.5 lakh in my PPF account?

    No, you cannot deposit more than Rs 1.5 lakh in a particular financial year.
     
  15. On maturity I chose the option of extension with no further contributions, but now I wish to make some more deposits. Can I make fresh investments in my PPF account?

    No, you can’t go back and change your mind. Hence, it is safer to choose ‘continue with deposits’, because even if you don’t want to invest a large amount, you can always invest as low as Rs 500 over the entire year. This gives you the flexibility to invest a bigger amount later, if you want.
     
  16. What role does my bank play in my PPF Account? The bank that you have your account with is operating only as a collection centre, nothing more. Banks have no access to your PPF funds and can't even use them as a float. They earn only very little for holding the money and also don’t really need to be concerned about what happens to it.  

To Sum-up…

Broadly, the PPF account is a good investment avenue, especially for those individuals who do not work in the corporate sector and hence don’t have an EPF account, even for salaried individuals nonetheless.

From a tax perspective, this is a very sound avenue, giving you tax deductions on investment as well as tax exemption at the time of maturity. This money is yours for keeping – it cannot be attached by the order of a court to any debt or liability you may have.

However, it is important to note that from a liquidity point of view, your funds are locked in for 15 years, and withdrawals are limited. Given that it is such a long term investment (16 years from beginning to end); the rate of return might be considered low by some for this tenure. But keep in mind, it is guaranteed, backed by the Government and cannot be attached to any debt.

To conclude, when choosing your tax saving avenue, be sure to choose according to your risk appetite. If you have a risk appetite of a conservative to a moderate investor, the PPF is a very good investment avenue. Even if you are an aggressive investor, the PPF can be a safe hedge against your more risky investments. Keep your liquidity needs, life goals, time horizon and risk appetite in mind while investing.

If you wish to save these important details you can now download our Free PPF Guide . for your future reference.

To know how PPF serves as one of the Tax Planning Option for Conservative Investors watch this video.
 



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