Public Provident Fund
The Public Provident Fund (PPF) is a savings-cum-tax-saving instrument in India, introduced by the National Savings Institute of the Ministry of Finance. The main objective of the scheme is to mobilize small savings by offering an investment with reasonable returns combined with income tax benefits. The scheme is fully guaranteed by the Central Government.
Individuals who are residents of India are eligible to open their account under the Public Provident Fund, and are entitled to tax-free returns.
Investment and returns
A minimum yearly deposit of ?500 is required to open and maintain a PPF account. A PPF account holder can deposit a maximum of ?1.5 lacs in his/her PPF account (including those accounts where he is the guardian) per financial year. There must be a guardian for PPF accounts opened in the name of minor children. Parents can act as guardians in such PPF accounts of minor children. Any amount deposited more than ?1.5 lacs in a financial year will not earn any interest. The amount can be deposited in lump sum or in instalments per year. However, this does not mean a single deposit once in a month.
The Ministry of Finance, Government of India announces the rate of interest for PPF account every quarter. The interest compounded annually and paid in March every year. Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month.
PPF maturity options
Subscriber has 3 options once the maturity period is over.
- Complete withdrawal.
- Extend the PPF account with no contribution – PPF account can be extended after the completion of 15 years, subscriber doesn't need to put any amount after the maturity. This is the default option meaning if subscriber doesn't take any action within one year of his PPF account maturity this option activates automatically. Any amount can be withdrawn from the PPF account if the option of extension with no contribution is chosen. Only restriction is only one withdrawal is permitted in a financial year. Rest of the amount keeps earning interest.
- Extend the PPF account with contribution - With this option subscriber can put money in his PPF account after extension. If subscriber wants to choose this option then he needs to submit Form H in the bank where he is having a PPF account within one year from the date of maturity (before the completion of 16 yrs in PPF). With this option subscriber can only withdraw maximum 60% of his PPF amount (amount which was there in the PPF account at the beginning of the extended period) within the entire 5 yrs block. Every year only a single withdrawal is permitted.
Loans
Loan facility is available from 3rd financial year up to 5th financial year. The rate of interest charged on loan taken by the subscriber of a PPF account on or after 12 December 2019 shall be 1% more than the prevailing interest on PPF.
Up to a maximum of 25 percent of the balance at the end of the 2nd immediately preceding year would be allowed as loan. Such withdrawals are to be repaid within 36 months.
Features
- The minimum amount is ?500 which can be deposited.
- The rate of interest at present is 7.1% per annum (as of April 2020).
- Interest received is tax free.
- The entire balance can be withdrawn on maturity.
- The maximum amount which can be deposited every year is ?150,000 in an account at present.
- The interest earned on the PPF subscription is compounded annually.
- All the balance that accumulates over time is exempted from wealth tax
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).
- 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