Public Provident Fund (PPF) – Features and Tax Benefits

Welcome to the world of financial planning and secure investments! Since its inception in 1968, the Public Provident Fund (PPF) has been a beacon for individuals seeking a reliable avenue to grow their wealth while enjoying tax benefits. Designed to encourage small contributions, the PPF serves as not just an investment platform but a trusted companion on your journey towards building a robust retirement fund. This unique financial tool not only offers a safe haven for your hard-earned money but also provides guaranteed returns. If you’re looking for a secure and tax-efficient investment option, opening a PPF account might just be the strategic move you need.

Join us as we delve into PPF, exploring its multifaceted benefits and decoding the path to financial stability and tax savings.

What is Public Provident Fund (PPF)?

The Public Provident Fund (PPF) is succinctly defined as a long-term investment scheme, gaining favor among individuals seeking a balance of high and stable returns. The paramount objective for those opting to open a PPF account is the meticulous preservation of the principal amount.

Upon initiation of a PPF scheme, a dedicated PPF account is established for the applicant. Monthly deposits are made into this account, and the accrued interest compounds over time. This structured approach not only underscores the commitment to long-term financial growth but also ensures a prudent and secure investment avenue for individuals navigating the intricacies of wealth management.

Why is Public Provident Fund (PPF) Important?

The Public Provident Fund (PPF) scheme is an optimal choice for individuals inclined towards a conservative risk approach. Endorsed by the government, this plan offers guaranteed returns, fortifying the financial security of the masses in India. Notably, the PPF account operates independently of market fluctuations, shielding against market-linked uncertainties.

Beyond its low-risk appeal, the PPF scheme serves as a strategic tool for investors looking to diversify their financial portfolios. During periods of economic downturns, the stability inherent in PPF accounts ensures a reliable and consistent annual return on investment. Joining the Public Provident Fund regime becomes more than a financial decision; it becomes a prudent step towards fortifying one’s financial position amidst the dynamic landscape of economic cycles.

Features of the Public Provident Fund (PPF) Scheme

There are distinctive features that make the Public Provident Fund (PPF) account a preferred choice for many investors, let’s explore them:

Certainly! Here are the features of the Public Provident Fund (PPF) account without the use of bold fonts:

• Tenure: PPF comes with a minimum tenure of 15 years, extendable in blocks of 5 years as desired.
• Investment Limits: Investors can contribute a minimum of Rs. 500 and a maximum of Rs. 1.5 lakh per financial year, either as a lump sum or in a maximum of 12 instalments.
• Opening Balance: The account can be initiated with a minimal deposit of Rs 100 per month. However, annual investments exceeding Rs 1.5 lakh won’t earn interest or qualify for tax savings.
• Deposit Frequency: Deposits must be made at least once annually over a continuous period of 15 years.
• Mode of Deposit: Investors can choose from various deposit methods, including cash, cheque, demand draft (DD), or online fund transfers.
• Nomination: PPF account holders can designate a nominee either at the time of opening the account or later.
• Joint Accounts: PPF accounts are designed for individual ownership, and joint accounts are not allowed.
• Risk Factor: With the backing of the Indian government, PPF ensures guaranteed, risk-free returns and complete capital protection. The minimal risk involved makes it a useful diversification tool in an investor’s portfolio.
• Tax Benefit: PPF offers tax-free interest and maturity amounts under section 80C of the Income Tax Act, 1961.
• Partial Withdrawal: From the seventh financial year onwards, PPF account holders can make partial withdrawals, adding a layer of liquidity to this long-term investment vehicle.

Eligibility for Public Provident Fund (PPF)

Eligibility Criteria for a Public Provident Fund (PPF) account are as follows:

1. Indian Citizens: Individuals residing in India are eligible to open a PPF account in their name.
2. Minors: Minors are also permitted to have a PPF account, provided it is operated by their parents or legal guardians.
3. Non-Residential Indians (NRIs): NRIs are not allowed to open new PPF accounts. However, any existing account in their name remains active until the completion of its tenure. It’s important to note that NRIs cannot avail the benefit of extending these accounts for an additional 5 years, a privilege available to Indian residents.

Interest Rate on Public Provident Fund (PPF) Accounts

The Central Government of India governs the interest in Public Provident Fund (PPF) schemes. The primary objective is to offer a more lucrative interest rate compared to regular accounts held with commercial banks across the country.

As of now, the interest rate applicable to PPF accounts is 7.1%. It’s important to note that these rates are subject to periodic updates, which occur quarterly and are at the discretion of the government. This dynamic approach ensures that PPF account holders receive competitive returns aligned with prevailing economic conditions. Stay informed about these updates to make well-informed decisions regarding your PPF investments.

How Does a PPF Account Work?

The functioning of a Public Provident Fund (PPF) account is designed to offer flexibility and long-term financial growth. Here’s a breakdown of how a PPF account works:

• Account Opening: An adult can open a PPF account either for themselves or on behalf of a minor.
• Tenure and Lock-In Period: The PPF account has a fixed tenure of 15 years, and the lock-in period for the account is also 15 years.
• Deposit Limits: Deposits can range from a minimum of Rs. 500 up to a maximum of Rs. 1.5 lakh per financial year.
• Deposit Flexibility: Deposits can be made in a lump sum or in instalments, with no restrictions on the number of instalments per financial year.
• Tax Exemption: Deposits made to the PPF account are exempt from income tax under section 80C of the Income Tax Act.
• Minimum Deposit Requirement: A minimum deposit of Rs. 500 per financial year is required to keep the account active. Failure to meet this requirement results in the account being discontinued, and a penalty of Rs. 50, along with the minimum deposit, is needed to reactivate the account.
• Interest Rate: The PPF account earns interest at a rate of 7.1% per annum (Q2 FY2023-24), compounded annually.
• Loan Facility: A loan facility is available on the PPF balance, providing a source of liquidity.
• Partial and Premature Withdrawals: PPF account holders can make partial withdrawals or premature closures under specific conditions.
• Account Extension: Upon completing the 15-year tenure, individuals can choose to extend the PPF account with or without making additional contributions.
• Closure Option: Account holders also have the option to close the account after the completion of the tenure.

How to Open a PPF Account?

Opening a Public Provident Fund (PPF) account is a straightforward process, offering accessibility through both Post Offices and nationalised banks such as State Bank of India, Punjab National Bank, and even certain private banks like ICICI, HDFC, and Axis Bank.

Documents Required

1. Duly filled out the PPF account opening application form.
2. KYC documents such as Aadhaar, Voters ID, driver’s license, etc.
3. Residential address proof.
4. Nominee declaration form.
5. Passport-size photograph.

How to Open a PPF Account Online

There is a simple and easy process to opening your PPF Account online. Follow these steps;

• Log into your bank account via internet banking or mobile banking.
• Select the ‘Open a PPF Account’ option.
• Choose ‘Self Account’ or ‘Minor Account’ based on the account type.
• Fill in the relevant details and specify the annual deposit amount.
• Apply, and verify with an OTP sent to your registered mobile number.
• Your PPF account is created instantly, with the account number displayed on the screen. Confirmation details are sent to your registered email address.

How to Open a PPF Account at the Post Office

This is a straightforward process. One can simply follow these instructions;

• Obtain an application form from the nearest post office or online.
• Complete the form and submit it with the required KYC documents and a passport-size photograph.
• Make the initial deposit, ranging from Rs. 500 to Rs. 1.5 lakh per financial year.
• Once processed, a passbook is provided for the opened PPF account.

Loan Against PPF

• A loan can be availed between the 3rd and 6th year of having a PPF account.
• The maximum loan tenure is three years (36 months).
• The loan amount can be a maximum of 25% of the total available amount.
• A second loan can be taken before the 6th year if the first loan is fully repaid.

PPF Withdrawal

Certain rules govern the withdrawal process for a Public Provident Fund (PPF) account:

Maturity Withdrawal

• Full withdrawal of the PPF account balance is allowed only upon maturity, after the completion of the 15-year tenure.
• After 15 years, the entire amount, along with accrued interest, can be freely withdrawn, and the account can be closed.

Premature Withdrawal

• For those in need of funds before the 15-year maturity period, partial withdrawals are permitted from the 7th year, i.e., upon completing six years of the PPF account.
• Premature withdrawals can be made up to a maximum of 50% of the amount in the account at the end of the 4th year (preceding the year of withdrawal or the end of the preceding year, whichever is lower).
• Withdrawals can be made only once in a financial year.

Process for PPF Withdrawal

The procedure for withdrawal from a Public Provident Fund (PPF) account involves the following steps:

• Step 1: Obtain the withdrawal application form (Form 3/Form C) from the bank or post office where the PPF account was opened.
• Step 2: Fill in the application form with the relevant information. The form typically consists of three sections:
  • Section 1 (Declaration): Provide your PPF account number, the proposed withdrawal amount, and the number of years since the account was opened.
  • Section 2 (Office Use): Includes details such as the date the PPF account was opened, the total balance in the account, the date of the previous withdrawal (if any), the total available withdrawal amount, the sanctioned withdrawal amount, and the date and signature of the person in charge, usually the service manager.
  • Section 3 (Bank Details): Requests information about the bank where the money is to be credited directly or the details for issuing a cheque or demand draft. It is mandatory to enclose a copy of the PPF passbook along with this application.
• Step 3: Submit the filled application form to the concerned branch of the bank or post office where the PPF account is held.

Tax Benefits of PPF

Investing in the Public Provident Fund (PPF) offers several tax benefits, making it an attractive option for individuals. Here are the tax benefits associated with PPF:

Deductions under Section 80C

• PPF falls under the Exempt-Exempt-Exempt (EEE) category.
• All deposits made in the PPF are eligible for deductions under Section 80C of the Income Tax Act.
• The maximum contribution in a PPF account cannot exceed Rs. 1.5 lakh in a single financial year.

Tax Exemption at Withdrawal

• The accumulated amount and interest in a PPF account are exempt from tax at the time of withdrawal.
• The maturity amount is entirely tax-free, providing a significant benefit to investors.

No Premature Closure

• A PPF account cannot be closed before maturity, ensuring a long-term investment commitment.
• However, it can be transferred from one point of designation to another.

Nominee Closure in Case of Demise

• In the unfortunate event of the account holder’s demise, the nominee has the authority to file for the closure of the PPF account.

Understanding these tax benefits underscores the PPF’s status as a tax-efficient investment avenue, encouraging long-term financial planning and wealth accumulation while providing deductions and exemptions at various stages of the investment cycle.

How to Close a PPF Account

Closing a Public Provident Fund (PPF) account involves a straightforward process, but specific rules govern the withdrawal. Here is the process for closing a PPF account:

Closing After 15 Years

Full withdrawal of the PPF account balance is permissible only after the completion of the 15-year tenure.

Upon reaching the 15-year mark, the account holder can access the entire account balance, withdraw it fully, and close the account.

Premature Withdrawal Before 15 Years

Before completing the full tenure of 15 years, the entire account balance cannot be withdrawn.

Premature withdrawal is allowed under special circumstances after completing seven years, with a maximum limit of up to 50% of the account balance.

Procedure to Close a PPF Account

• Fill out Form C: Complete the relevant information in Form C, which is the application form for the withdrawal of the PPF amount. Attach your PPF passbook to the form.
• Submission: Submit the filled Form C along with the passbook to the relevant Post Office or bank branch where the PPF account is held.
• Processing: The application will be processed by the Post Office or bank, and the PPF account will be closed.
• Payment: The amount will be credited to the savings account linked to the PPF account.

What is Form C?

Form C is a withdrawal form used for partial withdrawals from a Public Provident Fund (PPF) account. It is divided into three sections:

Section 1

This section is for the account holder to provide essential information. It includes:

• PPF account number
• The desired amount to be withdrawn
• The number of years that have passed since the account was opened

Section 2

This part is for official use and contains details like:

• The date when the PPF account was opened.
• Total balance in the PPF account.
• Date of the previous withdrawal request approval.
• Total available withdrawal amount in the account.
• Amount authorised for withdrawal.
• The signature and date of the person in charge, typically the service manager.

Section 3: Bank Details Section

This section requests information about the bank where the funds are to be credited directly or the bank in whose favour the cheque or demand draft is to be issued. Enclosing a copy of the PPF passbook with this application is mandatory.

Form C is crucial when an individual wants to withdraw partially from their PPF account, providing a structured way to declare the intent, document necessary details, and ensure proper processing of the withdrawal request.

Closing your PPF Account Before Maturity

A Public Provident Fund (PPF) account can be closed before maturity, which is typically 15 years. Premature closure is allowed in the following situations:

Life-Threatening Sickness

If the account holder or their dependents face life-threatening illnesses, the PPF account can be closed prematurely.

Higher Education Expenses

Premature closure is permitted if the funds from the PPF account are required for the account holder or their children’s higher education expenses.

Change in Residential Status

In case of a change in the residential status of the account holder, leading to non-residency status, the PPF account can be closed before maturity.

It’s important to note that premature closure is allowed only after the completion of 5 years from the opening of the PPF account. Additionally, the account holder must provide relevant documentation or evidence supporting the specific circumstance necessitating the premature closure. The rules and conditions may vary, and individuals should check with the concerned post office or bank where the PPF account is held for detailed information and procedures related to premature closure.

Tranfering a PPF Account

The process of transferring a Public Provident Fund (PPF) account involves several steps to ensure a smooth transition. Here is the procedure for transferring a PPF account:

• Step 1: Visit the bank or post office branch where your PPF account is currently held.
• Step 2: Request the application form for transferring the PPF account and complete it with the relevant details.
• Step 3: The branch representative will process your application and forward it along with the following documents to the new branch:
  • A certified copy of the PPF account
  • Nomination form
  • Account opening application
  • Specimen signature
  • Cheque/Demand Draft for the outstanding balance of the PPF account
• Step 4: Once the new branch receives your application and supporting documents, you need to:
  • Submit a new PPF account opening application.
  • Provide the old PPF account’s passbook.
  • You may change the nominee at this point.
• Step 5: After processing the application, your PPF account will be successfully transferred to the new branch.

These steps can help individuals ensure a hassle-free transfer of their PPF account, whether it’s within the same bank or post office or when switching between a bank and a post office. It’s advisable to check with the concerned institution for any specific requirements or documentation needed for the transfer process.

Banks Offering PPF Accounts

Opening a Public Provident Fund (PPF) account is convenient, and you can choose from various participating banks or visit the nearest post office branch.

Here is a list of participating banks where you can open a PPF account:

• State Bank of India
• Bank of Baroda
• Punjab National Bank
• Bank of India
• Union Bank of India
• Central Bank of India
• Oriental Bank of Commerce
• IDBI Bank
• HDFC Bank
• ICICI Bank
• Axis Bank
• Kotak Mahindra Bank
• Bank of Maharashtra
• Dena Bank

Linking Aadhar to Your PPF Account

To link Aadhaar with a PPF account online, follow these steps:

• Log in to your internet banking account.
• Navigate to the ‘Registration of Aadhaar Number in Internet Banking’ option.
• Enter your 12-digit Aadhaar number and click on ‘Confirm’.
• Select the specific PPF account that you want to link to the Aadhaar number.
• Complete the process, and your PPF account will be successfully linked to your Aadhaar number.
• To verify if the Aadhaar linking request is completed, click on the ‘Inquiry’ option on the homepage.

Activating an Inactive PPF Account

To activate an inactive PPF account, you can follow these steps:

• Prepare a written letter addressed to the bank or post office branch where the PPF account is held. Request the reactivation of the account.
• Accompany the letter with a payment of a minimum amount of Rs. 500 for each year in which no contributions were made. Additionally, include a penalty of Rs. 50 for each inactive year.
• Submit the written letter along with the required payment to the bank or post office.
• The bank or post office will process your request, and upon verification of the payment and penalty, the PPF account will be reactivated.

What is Better: PPF vs Mutual Funds

The Public Provident Fund (PPF) and mutual funds are distinct investment options, each with its characteristics. Here’s a comparison between PPF and mutual funds:

PPF

• Government-Backed: PPF is a government-backed savings scheme that provides guaranteed returns.
• Tax Benefits: Contributions to PPF are eligible for tax deductions under Section 80C, and interest earned is tax-free.
• Fixed Returns: PPF offers fixed returns, and the interest rate is periodically set by the government.
• Long-Term Commitment: The PPF account has a lock-in period of 15 years, with the option to extend in blocks of 5 years.
• Limited Liquidity: While partial withdrawals are allowed from the 7th year, complete withdrawal is only permitted at maturity.

Mutual Funds

• Market-Linked: Mutual funds invest in a diversified portfolio of stocks, bonds, or both, offering market-linked returns.
• Tax Benefits (ELSS): Equity Linked Savings Schemes (ELSS) among mutual funds provide tax benefits under Section 80C.
• Varied Returns: Mutual funds have the potential for higher returns, but they come with market risks. Returns are not guaranteed.
• Flexible Tenure: Most mutual funds do not have a fixed tenure, providing flexibility in terms of investment duration.
• Liquidity: Mutual funds generally offer higher liquidity, allowing investors to redeem units at any time (subject to exit loads and market conditions).

Considerations

• Risk Tolerance: PPF is considered low-risk, while mutual funds carry varying levels of risk based on the fund type.
• Return Expectations: PPF provides stable but lower returns, while mutual funds have the potential for higher returns.
• Tax Planning: PPF is eligible for tax benefits, but mutual funds can offer tax advantages through ELSS.
• Investment Horizon: PPF is suitable for long-term goals, while mutual funds can cater to both short-term and long-term objectives.

Ultimately, the choice between PPF and mutual funds depends on individual financial goals, risk tolerance, and investment preferences. Some investors may even choose a combination of both to diversify their portfolio.

What is Better: PPF or FD?

Choosing between a Public Provident Fund (PPF) and a Fixed Deposit (FD) depends on individual financial goals, preferences, and risk tolerance. Here’s a comparison between the two:

PPF

• Tenure: Fixed tenure of 15 years.
• Taxation: Returns are tax-free.
• Interest Rates: Set by the government, subject to periodic revisions.
• Loan Options: Allows loans against the account with limitations.
• Loan Types: Limited types of loans are available.

FD

• Tenure: Flexible, ranging from days to years.
• Taxation: Interest earned is subject to taxation, including TDS.
• Interest Rates: Determined by individual banks, can vary.
• Loan Options: Allows loans against the FD up to a certain percentage.
• Loan Types: FDs can serve as collateral for various loan types.

Considerations

• Tenure Preference: PPF is suitable for long-term goals, while FDs offer flexibility with various tenures.
• Tax Implications: PPF provides tax-free returns, making it attractive for tax planning. FDs, however, are subject to taxation.
• Interest Rate Variation: FD interest rates vary among banks and may be influenced by market conditions. PPF interest rates are set by the government.
• Liquidity Needs: FDs offer more liquidity with the flexibility to choose short-term tenures. PPF has a lock-in period of 15 years.
• Loan Requirements: If loans are a consideration, the terms for PPF and FD loans differ, with FDs offering higher loan amounts.
• Risk Tolerance: PPF is considered a safer option due to government backing, while FDs may carry some degree of risk depending on the bank’s stability.

Some individuals may opt for a combination of both PPF and FDs to diversify their savings portfolio.

What is Better: LIC or PPF?

Comparing LIC (Life Insurance Corporation) with the Public Provident Fund (PPF) involves assessing different financial instruments that serve distinct purposes:

Insurance vs. Investment

LIC provides life insurance coverage, safeguarding against risks and ensuring financial protection for dependents in the event of the policyholder’s demise. PPF, on the other hand, is a government-backed savings scheme primarily designed for long-term investment, offering stable returns and tax benefits.

Purpose and Priorities

Insurance is essential for individuals with dependents relying on their income. LIC offers various insurance plans, including term insurance, ULIPs, and endowment plans. PPF focuses more on long-term savings and wealth accumulation, serving as an investment avenue with tax advantages.

Cost-Effective Approach

Combining a term insurance policy with PPF is often considered a cost-effective approach. Term insurance provides adequate coverage, while PPF contributes to long-term savings.

Term Insurance vs. ULIPs

Term insurance policies are typically more cost-effective and straightforward, offering pure life coverage without an investment component. ULIPs, which integrate insurance with investment, may have higher expense ratios and hidden charges, potentially making them less cost-effective.

Clear Objectives

Separating investment and insurance needs is often recommended for a clearer and more efficient financial strategy. Opting for a term insurance policy alongside investing in a PPF allows individuals to address insurance and investment goals without unnecessary complexity.

To sum up, choosing between LIC and PPF depends on individual financial goals and priorities. For comprehensive financial planning, considering a term insurance policy alongside PPF is a prudent approach, ensuring both insurance coverage and long-term savings.

Limitations of PPF Account

Public Provident Fund (PPF) accounts come with certain limitations that should be considered:

Lock-in Period

PPF has a lock-in period of 15 years, which is longer than some other tax-saving investments like Equity Linked Saving Scheme (ELSS), which has a lock-in period of three years. This extended lock-in period can be challenging in emergencies or when there is a need for funds during the investment period.

Moderate Interest Rate

The interest rate offered on PPF accounts could be a lot higher, especially considering it is a long-term investment scheme. Other options like ELSS have the potential to provide higher returns, possibly in double digits.

No Joint Holding

PPF accounts cannot be held jointly, limiting the option to open joint accounts with spouses or other family members.

Investment Limit

The maximum annual investment limit in a PPF account is ₹1.5 lakh. In contrast, there is no limit on the amount that can be invested in other tax-saving instruments like ELSS funds, NPS, or FDs. However, the maximum tax benefit that can be claimed remains the same at ₹1.5 lakh under Section 80C.

NRI Restrictions

NRIs cannot open new PPF accounts. If an individual has a PPF account as a resident Indian and becomes an NRI, they can continue making deposits into the account but cannot open new PPF accounts.

Considering these drawbacks, it is essential to carefully evaluate your financial goals and circumstances before deciding to invest in a PPF account.

FAQs about PPF