Have you been thinking about opening a PPF account? Let us tell you everything about the Public Provident Fund Scheme.
Looking to invest for the long term? Here’s an investment option that gets you dual benefits – Public Provident Fund (PPF). How you ask? PPF is a non-risky government-initiated investment scheme that allows you to build retirement savings, and also gives you great tax benefits. So, if you haven’t yet opened a PPF account, read on to find out why it’s a good idea.
What is a Public Provident Fund?
A Public Provident Fund or PPF is a long-term investment option introduced by the Government of India. The scheme is risk-free and offers an attractive interest rate. What’s more, the returns are fully exempted from tax.
The Public Provident Fund was introduced by the government to provide retirement security to employed and self-employed individuals in the country.
Additional Reading: 7 Things You Should Know About PPF
The lock-in period for a Public Provident Fund account is 15 years. Your PPF account will mature after a period of 15 years from the end of the year in which the account was opened. On the maturity of your PPF account, you can extend the tenure any number of times but only for a period of five years each time. The extension can be made with or without making any further deposits. If you choose to extend the tenure of your PPF account, this must be done within 12 months from the date of maturity.
Rate of interest on your PPF account
The rate of interest on a PPF account is fixed on an annual basis. It changes with every passing year. The current rate of interest (effective 1st April 2018) is 7.6%.
The interest on your PPF account is calculated on the minimum balance in your account between the 5th and the last day of every month. Also, the interest is compounded annually and credited on the 31st of March every year.
Check Out: Know about PPF Calculator
Eligibility to open a PPF account
All Indian residents are eligible to open a PPF account.
Non-resident Indians are not eligible to open a PPF account. However, if an individual opened a PPF account when they were resident in India, but became NRI during the tenure of the PPF account, such individuals will be eligible to continue investing in the PPF account until the maturity. The funds held in such accounts cannot be transferred overseas. It can be used only in India.
Opening a PPF account
If you think you’re ready to open a PPF account, here are the places you can do that:
- Branches of State Bank of India
- Select Post Offices across India
- Select branches of designated nationalised banks
You need the following documents to open a PPF account:
- Account Opening Form – Form A
- Copy of your PAN Card
- Residence Proof – Electricity Bill/Passport
- Passport-size photograph
- You can open a PPF account with an initial deposit of as little as Rs. 100.
- A minimum annual deposit of Rs. 500 is necessary to keep your PPF account active.
- A maximum deposit of Rs. 1, 50,000 can be made in your PPF account in a financial year.
- If you invest more than Rs. 1, 50,000 in a PPF account in a financial year, you may not be eligible for the interest on the excess amount.
- You can make deposits to your PPF account on a monthly basis or at your convenience. A maximum of 12 deposits can be made in a year.
You can withdraw an amount up to 50% of the balance in your account at the end of the fourth year (this includes the investments you’ve made as well as the compounded interest on it). You’ll be eligible for this partial withdrawal only after you complete five years. For instance, if you started your PPF account in February 2018, you can make a partial withdrawal only in April 2023.
Apart from premature withdrawal, you can avail a loan against your PPF account from four years of investment till you complete six years of investment. The interest rate will be 2% over the existing interest rate on PPF. So, if you take a loan against your PPF today (4th May 2018), the interest rate applicable for the loan will be 9.6%.
The repayment of the loan from the PPF account has to be made in one lump sum or in two or more instalments within a period of 36 months. After the repayment of the principal amount, you will need to pay the interest amount within a maximum of two monthly instalments.
Premature closure of PPF account is possible in case of financial exigencies such as a medical emergency, etc. However, you cannot prematurely close your PPF account before completing five years even if there is a financial exigency at hand.
Additional Reading: All You Need To Know About PPF Withdrawals, Loans And Pre-Closures
How many PPF accounts is too many?
- You are allowed to operate only one PPF account in your name.
- You can open a PPF account in the name of a minor child if you are the parent/guardian.
What to do if your PPF account is deactivated
If you do not deposit the minimum amount of Rs. 500 in a financial year, your PPF account will be marked as a deactivated account. To re-activate your PPF account, you will need to pay a penalty of Rs. 50 for each year that you have not made any deposits. You will also need to make a minimum deposit of Rs. 500 for each year that you have missed.
Save tax with a PPF account
A PPF account is a good tax-saving investment option because deposits of up to Rs. 1,50,000 p.a. in your PPF account are deductible under Section 80C of the Income Tax Act. The interest accrued on the full balance in your PPF account is entirely exempt from tax. The balance in your PPF account cannot be attached to any claim in case you have debts or liabilities.
In short, PPF enjoys the triple tax benefits – Exempt, Exempt and Exempt – tax deduction under Section 80C, no tax on interest earned, and no tax on the maturity amount.
Additional Reading: 15 Things You Need To Know About PPF
So if you’re in it for the long term, and if you’re ready to block your funds for another 15 years, a PPF account is your answer. Else, if you’re willing to take a little risk, equities can help you grow your wealth over the long term. We can help you build your equity portfolio <wink>.