10 things you must know on Public Provident Fund

Public Provident Fund (PPF) is one of the most popular tax-saving instruments in India. PPF gives an option to salaried individuals, who are not covered under Employees Provident Fund (EPF), to accumulate retirement corpus. PPF was introduced in year 1968.

Here are top 10 things you need to know about Public Provident Fund. These will help you to make informed investment decisions.

Eligibility

Any resident individual including a minor can open a PPF account. However for minor PPF account must be open with a guardian. A guardian can be either the father or the mother (not both) or a court-appointed guardian.

A grandfather or grandmother cannot open PPF account on behalf of their grandchild except in cases where both the parents have died. A person cannot open more than one account in his/her own name. However, an account opened on behalf of a minor is treated as separate. Also account can’t be joint account.           

Non-resident individuals (NRI), Hindu Undivided Families (HUF) or body of individuals (BoI) cannot invest in PPF.  However, if a resident becomes an NRI during the term of PPF i.e. post opening of account, then he may continue his account till its maturity on a non-repatriation basis. 

Opening of account

A PPF account can be opened with any registered bank or a post office. An individual can open only one PPF account in their own name. PPF accounts are portable means shifting of account can be easily done. 

Minimum and Maximum deposits

PPF accounts can be opened with minimum initial deposit of Rs 100. However minimum amount to maintain the account is Rs 500 per year. The maximum amount that an investor can deposit in a financial year is Rs 1.5 lakh. However, maximum 12 installments of deposits can be made in a financial year.

If you don't deposit the minimum contribution, i.e. Rs 500, in a particular financial year, your PPF account will become inactive. To revive an inactive account, depositor has to pay a penalty of Rs 50 per year for the number of years the account has been inactive along with a minimum contribution of Rs 500 per year. 

Interest Rates

The interest rate is announced by government and will vary during the tenure of account. Current rate of interest is 8%. Interest rate will be compounded annually. Read historical PPF rates here in our article 

Lock-in Period

PPF account tenure is of 15 years. After maturity, an investor has the option to extend the maturity period of the PPF account in a block of 5 years. There is no restriction on the number of times for which such extensions can be done. One can continue account for a further block of 5 years with or without any additional contribution. 

Taxation

This is the most attractive feature of PPF. PPF is an investment instrument with an exempt- exempt- exempt (EEE) status. This means you can get tax exemption 3 times. First on the contribution made up to Rs 1.5 lakh per annum is exempt under section 80C. Second exemption is on accumulated returns i.e. interest accrued to your PPF account. And third tax exemption is on withdrawal made on maturity, making PPF 100% tax free in the hands of an investor. 

Partial liquidity

Premature withdrawals can be made post completion of 6 years from date of account opening. Investor can make one withdrawal each year. Maximum amount that can be withdrawn is capped at 50% of the total balance at the end of the fourth year immediately preceding the year of withdrawal or the year immediately preceding the year of withdrawal, whichever is lower.

In case of extension, during the block of 5 years, you can only withdraw once a year. However, maximum of 60% of the initial corpus (balance at the start of block) can be withdrawn. 

Loan Facility

Loan facility available for PPF accounts from 3rd financial year up to end of 6th financial year. The rate of interest shall be 2% more than the prevailing interest on PPF. Up to a maximum of 25 % of the balance at the end of the 2nd immediately preceding year would be allowed as loan. Loan need to be repaid within 36 months.

Inactive accounts or discontinued accounts are not eligible for loan.

Premature closure

Premature closure of PPF account is permitted after completion of 5 years only for medical treatment of family members and for higher education of PPF account holder. But this comes with an interest penalty of 1%. 

Court decree

PPF account is totally safe in the hands of an investor as the account money can’t be seized by a court order. In other words, court cannot give an official takeover order of your account under any circumstances. 

Portability

PPF account is highly portable. This means you can shift your account from one city to another. Also account can be shifted from bank to post or vice-versa

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