Ultimate Guide for Public Provident Fund (PPF)

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The Public Provident Fund (PPF) is a long-term savings instrument established by the Central Government.  It offers tax benefits on contributions as well as withdrawals after the lock-in period.  This scheme came into force on July 1, 1968, and is backed by the government with the objective of providing old-age income security to the self-employed and those working in the unorganised sector.  Though the scheme is voluntary, assured returns and income tax benefits have fuelled its popularity.

Capital Protection & Inflation Protection:

The capital in a PPF account is completely protected as the scheme is backed by the Government of India, making it fully risk-free with guaranteed returns. The PPF account is not inflation protected, which means whenever inflation is above the latest guaranteed interest rate, the deposit earns no real returns.  However, when the inflation rate is below the guaranteed rate, it does manage a positive real rate of returns.

 Investment Objective and Risks:

The Primary objective of saving in the PPF account is to avail tax deduction on deposits, guaranteed returns on investment and tax-free withdrawal on maturity.  Savings in this product are completely risk-free because of the government backing.

 Guarantees:

Interest rates are aligned with G-Sec rates of similar maturity, with a spread of 0.25 per cent.  The government has decided to review the PPF rates quarterly.  For the third quarter of FY 16-17, the rate has been set at 7.9 percent compounded annually.

Liquidity:

The PPF is liquid, despite the 15-year lock-in stipulated with this account.  Liquidity is offered in the form of loans against the PPF and the third year and withdrawals subject to conditions from the seventh year.

 Tax Implications:

The scheme has exempt-exempt-exempt [EEE] status, where the deposits, the interest earned as well as the maturity amount are tax-free.

The Sum Invested in the PPF account if eligible for tax deduction under Section 80C subject to a maximum of Rs.1.5 Lakh in a financial year.  On maturity, the entire amount, including the interest, is tax-free.  The deposit is also exempt from wealth tax.

FEATURES:

ELIGIBILITY:

You need to be a resident Indian.

ENTRY AGE:

No age is specified for account opening.

INVESTMENTS:

Minimum Rs.500 per annum.

Maximum Rs.1,50,000 per annum.

A maximum of 12 deposits allowed in a financial year.

INTEREST:

7.9% percent compounded annually.

TENURE:

15 Years.On completion of 15 years, the account can be extended by five years at a time.

The PPF account matures after 15 years but the contribution has to be made for 16 years in all.  The 15-year period is calculated from the financial year following the date on which the account is opened.  Effectively, the PPF account matures on the first day of the 17 years.  However, it can be extended indefinitely 5 years at a time.

 ACCOUNT-HOLDING CATEGORIES:

  • Individual.
  • Minor through the guardian.

 NOMINATION:

This facility is available.

 EXIT OPTION:

Premature closure of a PPF account is not permissible except in the case of death of the account holder.

 LOANS:

Loans against the PPF are available from the third year of opening the account to the sixth year, wherein the loan amount will be up to a maximum of 25 percent of the balance in the account at the end of the first financial year.  However, the loan has to be repaid with interest within 36 months.  For loans before December 1, 2011, the interest rate is 1 per cent per annum and for loans thereafter, it is 2 percent.

In a financial year, one withdrawal of up to 50 percent of the balance at the end of the fourth year or at the end of the preceding year, whichever is lower, can be withdrawn.  However, this withdrawal can be made seventh year onwards.  For example, if the account is opened in 2010-11 and the first withdrawal is made during 2017-18, the amount one can withdraw is limited to 50 per cent of the balance on March 31, 2014, or March 31, 2017,  whichever is lower.  Thereafter one withdrawal every year is permissible.

 WHERE TO OPEN AN ACCOUNT:

Once you have selected the location to open an account, you will need the following documents.

  • An account-opening  form.
  • Two passport  size photographs.
  • Address and identity proof such as the Aadhaar Card, Passport, PAN (Permanent Account Number)  or declaration in Form 60 or 61 as per the Income Tax Act, 1961, driving license, voter’s identity card or ration card.
  • Carry original identity proof for verification at the time of account opening.
  • Choose a nominee.

 HOW TO OPERATE A PPF DEPOSIT:

  • You need a Pay-in-slip with the initial account-opening sum to be credited into your account.
  • You get a PPF passbook with your photo affixed, stating the nominee’s name.

 POINTS TO REMEMBER:

The PPF account enjoys tax benefits for contributions up to 1.5 Lakh.  Its interest and maturity proceeds are also exempt from tax.

It has a 15 year tenure which can be extended in installments in 5 years.  Loans against it can be taken from the third year onwards and withdrawals are permitted from the seventh year onwards.

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