Public Provident Fund (PPF): features and benefits, eligibility, tax implications, and more.

Tarun Pawar -March 17, 2023

0

Public Provident Fund (PPF) is a popular long-term investment scheme offered by the Indian government, aimed at promoting savings among individuals while providing them with attractive returns on their investments. Launched in 1968, the PPF scheme has become a preferred investment option for individuals who seek a safe and reliable mode of investment with guaranteed returns. It is a tax-free investment scheme, with a lock-in period of 15 years, which can be extended further in blocks of 5 years. In this article, we will discuss the features, benefits, and eligibility criteria for investing in PPF, and how it can help individuals achieve their financial goals.

Income Tax Benefits And Eligibility Criteria For Opening PPF Account

PPF is a tax-saving investment scheme, which provides tax benefits under Section 80C of the Income Tax Act. The contributions made towards the scheme are eligible for deduction up to Rs. 1.5 lakhs in a financial year. The interest earned and the maturity amount are also tax-free.

To be eligible for opening a PPF account, an individual must be a resident of India and can be either an adult or a minor. Non-resident Indians (NRIs) are not eligible to open a PPF account, but those who have already opened an account before becoming an NRI can continue to hold the account till maturity.

The tenure of the PPF account is 15 years, which can be extended further in blocks of 5 years. The interest rate on PPF is decided by the government and is subject to change every quarter. However, once the interest rate is fixed, it remains the same for the entire year.

Also Read: Kisan Vikas Patra (KVP): features and benefits, eligibility criteria, how to invest, tax implications, and more.

"SUKANYA SAMRIDDHI ACCOUNT"

Interest Rate, Calculation Of Interest, Compounding Frequency In PPF Account

The interest rate on PPF is fixed by the government and is subject to change every quarter. As of the first quarter of 2023, the interest rate is 7.1% per annum. The interest is calculated on a monthly basis, but it is credited to the PPF account at the end of the financial year, i.e., on March 31st.

The interest calculation in a PPF account is based on the lowest balance between the 5th and the last day of every month. Therefore, it is advisable to deposit the money in the account before the 5th of the month to get the maximum benefit of interest.

The interest earned on PPF is compounded annually. This means that the interest earned in the first year is added to the principal amount, and the interest for the second year is calculated on the new amount (principal + interest of the first year). The same process is followed for subsequent years. The compounding of interest in PPF is an important factor that contributes to the growth of the investment over a long-term period. As the interest is compounded annually, the effective rate of return on the investment is higher than the nominal interest rate offered by the scheme.

To illustrate the calculation of interest in a PPF account, let us consider an example. Suppose an individual opens a PPF account with an initial deposit of Rs. 1,00,000 on April 1, 2022, and makes a monthly deposit of Rs. 10,000. The interest rate for the financial year 2022-23 is 7.1% per annum. The interest calculation for the year 2022-23 would be as follows:

The interest rate for the year 2022-23 is 7.1% per annum.
The interest earned for the year 2022-23 would be Rs. 9,958.96.
The interest earned would be added to the principal amount, which would become Rs. 1,19,958.96.
The interest for the year 2023-24 would be calculated on the new amount (principal + interest of the first year), which would be Rs. 1,29,143.17 (Rs. 1,19,958.96 + Rs. 9,184.21).

The same process would be followed for subsequent years, till the maturity of the account.

PPF Account Withdrawal, Maturity And Premature Closure

Withdrawal, maturity, and premature closure are important aspects of a PPF account that individuals should be aware of.

Withdrawal: Withdrawals from a PPF account can be made only after completion of 5 years from the date of opening the account. The withdrawal limit is restricted to 50% of the balance at the end of the fourth year or the balance at the end of the preceding year, whichever is lower. Only one withdrawal is allowed in a financial year.

Maturity: The maturity period of a PPF account is 15 years from the date of opening the account. At the end of the maturity period, the entire balance in the account can be withdrawn without any restrictions. The account can also be extended for a further period of 5 years at a time, with or without making further contributions.

Premature Closure: Premature closure of a PPF account is allowed only after completion of 5 years from the date of opening the account, subject to certain conditions. In case of premature closure, a penalty of 1% per annum is levied on the outstanding balance. Premature closure is permitted in the following cases:

Medical Emergency: If the account holder or his/her family member needs medical treatment that is not covered by health insurance, then the account can be closed prematurely.

Higher Education: The account holder can withdraw the balance for the higher education of his/her children or for his/her own higher education.

Change in Residential Status: If the account holder becomes a non-resident Indian, then the account will be deemed to be closed from the date of change in residential status.

Death of the Account Holder: In case of the death of the account holder, the account can be closed prematurely by the nominee or the legal heir.

It is important to note that premature closure of a PPF account should be avoided as far as possible, as it can have a significant impact on the final maturity value of the investment. Therefore, individuals should carefully plan their investments in PPF and take into consideration the lock-in period and the potential impact of premature closure.

Where To Open PPF Account And Account Transfer

PPF accounts can be opened at designated banks and post offices. Some of the popular banks that offer PPF accounts include State Bank of India (SBI), ICICI Bank, HDFC Bank, Punjab National Bank (PNB), etc. To open a PPF account, an individual needs to submit an application form along with the necessary documents such as identity proof, address proof, etc., and make the minimum deposit of Rs. 500, and the maximum deposit limit per year is Rs. 1.5 lakhs. The deposit can be made in one lump sum or in multiple installments, subject to a maximum of 12 deposits in a financial year.

PPF account transfer is also possible in case an individual wants to change his/her account from one bank or post office to another. The process of transferring a PPF account is simple, and it can be done by filling up the PPF transfer application form and submitting it to the bank or post office where the individual wants to transfer the account.

The PPF account transfer process involves the following steps:

Obtain a transfer request form (SB 10B) from the bank/post office where the account is currently held.

Fill up the form with the necessary details such as the name and address of the current and the new bank/post office where the account needs to be transferred.

Submit the filled-up form to the current bank/post office where the account is held.

The current bank/post office will then forward the original documents such as the account opening form, nomination form, and account statement to the new bank/post office.

The new bank/post office will then verify the documents and open a new PPF account in the name of the account holder.

The balance in the old account will be transferred to the new account.

It is important to note that the PPF account transfer process should be completed within one month from the date of submission of the transfer request form. Also, there is no fee for transferring a PPF account from one bank/post office to another.

Nomination For PPF Account

Nomination is an important aspect of a PPF account, as it helps in the smooth transfer of the account balance to the nominee or legal heir in case of the death of the account holder. A PPF account holder can nominate one or more persons as a nominee by filling up the nomination form (Form E) at the time of opening the account or any time during the tenure of the account.

The following are some important points to keep in mind while making a nomination for a PPF account:

The nomination can be made in favor of any individual, including minors.
The nomination can be changed or cancelled any time during the tenure of the account by filling up a fresh nomination form.
In case of multiple nominees, the account holder needs to specify the percentage of the amount to be received by each nominee.
If the nominee is a minor, then the account holder needs to specify the name of the guardian who will receive the amount on behalf of the nominee.
In case the nominee predeceases the account holder, the account holder needs to make a fresh nomination.
If the account holder does not make a nomination, then the legal heirs of the account holder will be entitled to receive the balance in the account.

It is advisable to make a nomination for a PPF account to ensure that the account balance is transferred smoothly to the nominee or legal heir in case of the death of the account holder. It is also important to keep the nomination details updated in case of any changes in the nominee's details.

Hey! Open an account with Zerodha to invest in stocks and mutual funds. Use this link to get 300 reward points.

Pros and Cons of PPF Account

PPF (Public Provident Fund) account is a popular investment option in India, offering attractive interest rates and tax benefits. However, like any investment, PPF account also has its pros and cons. Here are some of them:

Pros of PPF Account:

Attractive Interest Rates: PPF account offers a high-interest rate, which is fixed by the government every quarter. Currently, the interest rate is 7.1% per annum (as of January 2022), which is compounded annually.

Tax Benefits: PPF account offers tax benefits under Section 80C of the Income Tax Act, 1961. The amount invested in PPF account up to Rs. 1.5 lakh is eligible for a deduction from taxable income. The interest earned and the maturity amount are also tax-free.

Low Risk: PPF account is a government-backed investment option, which means the risk involved in this investment is low. It is a safe investment option for individuals who want to save for their long-term goals.

Long Tenure: The tenure of PPF account is 15 years, which can be extended for another five years. It is a long-term investment option, which is suitable for individuals who want to save for their retirement or other long-term goals.

Cons of PPF Account:

Low Liquidity: PPF account has a lock-in period of 15 years, which means the amount invested cannot be withdrawn before the maturity period. However, partial withdrawals are allowed after the completion of the 7th year of the account.

Low Returns: Though PPF account offers attractive interest rates, the returns are relatively low when compared to other investment options such as mutual funds, stocks, etc.

Fixed Investment: The amount invested in PPF account has to be fixed every year. The minimum investment amount is Rs. 500, and the maximum investment amount is Rs. 1.5 lakh per annum.

Interest Rate Fluctuations: The interest rate offered on PPF account is subject to change every quarter based on the government's decision. This may affect the returns earned on the investment.

In conclusion, PPF is an attractive investment option for individuals who seek a safe and reliable mode of investment with guaranteed returns, along with tax benefits. It is important to note that while PPF offers a long-term investment option, it should be considered as a part of the overall investment portfolio, and individuals should consult their financial advisor before making any investment decision. The interest rate on PPF is fixed by the government and is compounded annually. The interest calculation is based on the lowest balance between the 5th and the last day of every month, and the interest earned is credited to the account at the end of the financial year. The compounding of interest in PPF is an important factor that contributes to the growth of the investment over a long-term period.

Or we can say PPF account is a suitable investment option for individuals who want to save for their long-term goals and also avail tax benefits. However, it may not be suitable for individuals who need liquidity or are looking for higher returns on their investments.