Most people are hesitant when it comes to making investments in the Public Provident Fund (PPF). This is because the maturity period is long (15 years, that’s long!) and there is no premature closure option unless the account holder is no more.
Now, the Government has approved the premature closure of PPF accounts. However, there are certain terms and conditions. One is that you need to hold the PPF for at least five financial years before you choose to close it. Another is that the premature closure will be allowed only under certain circumstances. These circumstances include higher education expenses and medical treatment. Expenses for medical treatment need to be for life threatening diseases or serious ailments in case of self, spouse or dependent children. You also need to provide supporting documents that are signed by a registered medical practitioner. In case of higher education expenses, you need to produce the bills for the fees paid. The education institution can be in India or abroad.
Now that you can close your account before maturity, you should consider investing in a PPF. This is one of the best tax exempt investments in India. Read on to know more about it.
What is the Public Provident Fund (PPF) anyway?
The PPF is a long term, Government backed small savings scheme which was started with the objective of providing social security during retirement to the workers in India, especially those in the unorganized sector and for self-employed individuals.
What is the interest rate offered through PPF?
Currently, the interest rate for PPF is around 8.1%. This is compounded on an annual basis. Interest is calculated on the lowest balance between the fifth and the last day of the calendar month. This interest is credited to your PPF account on 31st March every year. So, to get the maximum interest on your PPF, the deposits should be made between the 1st and 5th day of the month. This is because even if you put in money after the fifth, only the lowest balance (that is the one on fifth) will be considered.
What is the duration?
If you are one who is interested in liquidity or small term gains, you would not be very keen about PPF because the duration of the investment is 15 years. However, the effective period works out to 16 years. This is because you need to include the year of opening the account to it. The contribution made from the 16th financial year will not earn any interest. But you can still claim those tax benefits.
You have an option to extend the PPF account for any period in a block of 5 years at the end of the investment maturity. You can, of course, retain the account after maturity for any period without making any further deposits. If there is a balance in the account, it will continue to earn interest at the applicable prevailing rate till the account is closed.
What is the minimum and maximum amount of deposit?
The minimum deposit for a PPF account in a single financial year is Rs. 500. The maximum is Rs. 1,50,000. However, you need only Rs. 100 to open the account.
Who can open a PPF account and where?
A PPF account can be opened by an Indian individual (salaried or self-employed). An individual can open only one PPF account. So, if you already are the guardian to a minor account you cannot open another account. A PPF account can also be opened in the name of your spouse or children. Joint accounts are not allowed.
A PPF account can be opened at any branch of the State Bank of India (SBI) or its associate banks such as the State Bank of Mysore or Hyderabad. The account can also be opened at the branches of several nationalized banks, such as the Bank of India, Bank of Baroda and Central Bank of India, or at any post office in the country.
Are there tax benefits?
There’s got to be a bright side, right? With PPF it’s the tax benefits. The amount you invest in PPF will be eligible for deduction under the Rs. 1,50,000 limit of Section 80C of the Income Tax Act. On maturity, the entire amount including the interest is not be subject to taxes. PPF is perhaps the only investment that comes under the EEE category. Not too shabby, huh? It is tax-exempt when you contribute to the investment (E #1). Returns from PPF are tax-exempt (that is E #2) and E #3 is that withdrawals are also tax-exempt.
Is it possible to withdraw during the tenure?
Yes, premature withdrawal is allowed from the 7th year. You can, however, take a loan against your PPF from the third year of opening your account up to the sixth year. For example, if the PPF account is opened in the financial year 2009-10, you could take a loan only during FY 2011-12 (the financial year is from 1st April to 31st March).
The withdrawal amount is restricted to 50% of your account balance as of the year before the year you withdraw or 50% of the account balance as of the 4th year into your account. But note that only lower of these two will be considered.
For example, if the PPF account was opened in FY 2000-01, and the first withdrawal was made during FY 2006-07, you can withdraw only up to 50% of the balance as on 31st March, 2003, or 31st March, 2004, whichever is lower.
National Savings Certificate (NSC) vs PPF
| National Savings Certificate (NSC) | Public Provident Fund (PPF) |
| Interest Paid: 8.1%, compounded half-yearly | Interest Paid: 8.1%, compounded annually |
| No monthly/yearly payments | No monthly/yearly payments |
| Minimum investment: Rs. 100
Maximum investment: No Limit |
Minimum investment: Rs. 500 (required annually)
Maximum investment: Rs. 1,50,000 |
| Duration of investment: 6 years | Duration of investment: 15 years |
| Can be used as a security for mortgage and other purposes. | Cannot be used for such purposes. |
| Tax benefit under Section 80 C available.
Maximum limit: Rs. 1,50,000 |
Tax benefit under Section 80 C available.
Maximum limit: Rs. 1,50,000 |
| Good medium-term investment option. | Good long-term investment option. |
Sold on PPF? Go ahead and invest for the best returns. But, remember that the most liquid investments are Fixed Deposits. The tax saver ones will offer tax benefits too. So, consider them for your short term goals.