PPF stands for Public Provident Fund.
'Provident' has a dictionary meaning of 'timely preparation for future' and true to its name PPF is a scheme operated by the government to help Indians save for their future.
You, of course, have already heard about it from your parents and friends. And, they have probably hounded you to open an account since forever.
And to be fair to them, PPF is genuinely amongst the best risk free long term investment options in addition to being a very good tax saving tool.
This post is a comprehensive guide on this investment vehicle...
And I will cover everything - features, current interest rates, tax benefits, loan options, withdrawal rules, transfer options and much more.
Few things I will cover in this Guide
- What is a PPF account?
- What's the minimum lock in period? What are the current interest rates?
- What are tax benefits that are applicable to this investment?
- How much should you invest each year? How to invest easily?
- What happens if you miss an Investment?
- Who can open a PPF account? How to open one easily?
- How to close or transfer your account?
- How to make withdrawals? How about loans?
- What to do once PPF matures?
- Some tips to get the max out of this facility
So let's get going? Shall we...
What is a PPF account?
PPF or Public Provident Fund is a long term savings scheme operated by Government of India. It was first introduced in 1968 to encourage people to put aside some money for their future and retirement and that goal hasn't changed since.
You will essentially contribute some money every year, earn an interest on it and will get back your money plus interest on maturity.
PPF is extremely popular and is considered to be a risk-free investment as it's fully backed by the Government of India.
What's the lock-in period that's applicable?
The lock-in period for a Public Provident Fund is 15 years. Yes, it's a bit on the long side, but then it is supposed to be for long term investments only.
Do note that the count for 15 years only starts from April 1st of next financial year and not from the actual year of investment e.g. if you end up opening your account on, let's say, July 10th, 2018, the 15 year count will start from April 1st, 2019 and not from July 10th, 2018.
What are current and the latest interest rates?
The current interest rate, as effective from April 1st, 2017, is 7.9% per annum.
The previous interest rate was 8% and was applicable from October 1st, 2016 till March 31st, 2017. These rates are revised by the government from time to time.
The interest is compounded annually (i.e. it is credited to your account at the end of the year) though the calculation is done every month.
The interest is calculated basis the lowest deposit between 5th of the month till the end of that month. So as you can see, the best time to invest is before the 5th of the month.
If you are transferring your funds online, it may take up to 3 days for the balance to reflect in your account so it's recommended to do the transfer around 2nd of the month.
What are the tax benefits associated with PPF?
Public provident fund is amongst the most tax efficient investment options as it's amongst very few Exempt-Exempt-Exempt (or EEE) options.
What that means is that your initial deposit, interest you earn every year and final maturity proceeds, all are totally exempt from any sort of taxes.
Essentially, your investment every year (to a max of 1.5 lakhs) is eligible for a tax deduction under Section 80C of Income Tax Act. Similarly, there is no tax liability on interests you earn. The maturity amount is completely tax free too.
Do note that if you have two accounts, one for you and one for your minor, the 80C benefits will be clubbed for both and the overall limit will still stay at 1.5 lakhs per year.
How much to invest and how to invest?
You will need an initial amount of INR 100 to open your account. Post that a minimum annual contribution of INR 500 is mandatory. However, the maximum contribution in any specific financial year is limited to INR 1.5 lakhs.
You can avail of a multitude of options to make do these investments. You can deposit through cash, cheque, demand draft or even do an online fund transfer (not available in post offices right now).
You have an option to make a one-time deposit every year or do your investments in a max of 12 installments.
Online fund transfers are typically the easiest ways to make PPF investments.
Read our detailed guide on how to invest in a PPF account online in an easy way
What happens if you miss an Investment?
You have to make the minimum deposit of INR 500 every single year to keep your account active. If you miss these payments, your PPF account will be deactivated. You will continue to earn interest till your account is finally closed at maturity.
However, the facility of loan or withdrawal won't be available on a de-activated account. Also, you can't open a new PPF account if you already have an old account that has been deactivated.
You can pay a fine of INR 50/year plus INR 500/year as minimum deposit to revive your account get all facilities back.
Who can open a PPF account as per rules?
Any Resident of India, above 18 years of age, can open a PPF account.
However, you can only have one account at a time. If the second account is detected, it will be closed and only principal will be returned to you. You can't have joint accounts as well.
If you have a minor (<18 years) to take care of, you can open an account in their name. You, as a guardian, will handle the investments though.
HUFs are not allowed to open these accounts anymore. Foreigners are not allowed as well.
NRIs, too, are not allowed to open a new account, but there is a silver lining for them.
If you have an old account from when you were still a Resident, you can continue to operate it till it matures i.e. 15 years. Do note that you won't have any option to extend your account any further and your funds won't be repatriable.
How to open a new PPF account?
You can get a new account from a post office or from an authorized bank. Here is a list of banks authorized to open Public Provident Fund accounts.
All you need to do is to fill the form, attach your photograph, provide your pan number and address proofs and you should be done. You can also fill this form online and then submit the printed and signed application form alongside required proofs to your bank.
Once your account is activated, you will get a passbook that will record all your provident fund transactions. If you initiated your application online, you will be able to see all these records through your net banking account.
Note that a public provident fund is independent from General Provident Fund account or an Employee provident fund. So, even if you already have one or both, you can still own a PPF account - there is no restriction as such.
How to close or transfer your account?
You can't close your account before 15 years. If you want to get some money out, look at loan and withdrawal sections.
Also, you can't transfer your account to somebody else's name. However, it's permitted to transfer your account from one place to another.
Transfer may be needed if you want an online investment facility and your account is in a Post Office that doesn't offer same.
The process of transfer is reasonably simple. You need to fill requisite documents and once those are reviewed, your PPF details and balance will be sent to your new account branch.
Once the documents are received by the new branch, you will be called by the branch to open a new account with them.
Note that this new account will still be treated as a 'continuing account' by the Government of India but it won't have any record of past transactions.
What are the loan facilities that PPF offers?
You don't have any loan facility on your account for the first year. But, from 2nd year till 6th year, you are eligible for one.
This loan will be limited to 25% of your overall balance at the end of the second year immediately preceding the year in which you apply for the loan. This loan must be paid back in 36 EMIs.
If you are interested, this is the exact clause governing this facility
Any time after the expiry of one year from the end of the year in which the initial subscription was made but before expiry of five years from the end of the year in which the initial subscription was made, a subscriber may, if he so desires, apply in Form D or as near thereto as possible, together with his pass book to the Accounts Office for obtaining loan consisting of a sum of whole rupees not exceeding twenty five percent of amount that stood to his credit at the ends of the second year immediately preceding the year in which the loan is applied for.
Source - PPF RuleBook by NSI
When can you withdraw your PPF?
A complete withdrawal of your money is only allowed after 15 years. However, it's possible to make partial withdrawals after a few years.
You can make your first withdrawal after five financial years from the end of the year in which your initial subscription was made. The amount of withdrawal is limited to 50% of your balance at the end of fourth year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower.
If you have availed of a loan against your account, that amount will be deducted from the amount that's permissible for withdrawal. You will be allowed to make one withdrawal each year.
Here is the exact clause from the rulebook:
Any time after the expiry of five years from the end of the year in which the initial subscription was made , a subscriber may, if he so desires, apply in Form C or as near there to as possible, together with his pass book to the Accounts Office withdrawing from the balance to his credit, an amount not exceeding fifty per cent of the amount that stood to his credit at the end of the forth year immediately preceding the year of withdrawal or at the end of preceding year, whichever is lower, less the amount of loan, if any, drawn by him under paragraph 10 and which remains to be repaid.
Provided that not more than one withdrawal shall be permissible during any one year
What to do once PPF matures? How many times can you extend it?
Once your account matures after 15 years, you have these three options:
- Withdraw it completely. All proceeds will be tax-free or
- Extend it by 5 years and continue making fresh contributions or
- Extend it by 5 years without making any fresh contributions, but continue to earn the interest on it
You can extend your account as many times as you want.
If you choose to extend your account without making any fresh contributions, you can withdraw any amount, but the frequency of withdrawal is limited to once a year.
If you go for extension with fresh contributions, you will still be allowed to do once a year withdrawal but with total withdrawal amount limited to 60% of your balance at the start of each extension period.
Please note that you need to extend your account within 1 year of maturity.
The ability to extend as many times as desired is the reason that I strongly recommend everybody to open their PPF account as early as possible.
Once you are past the first 15 years, the lock-in period effectively reduces to 5 years while all other benefits stay exactly the same (or even improve).
It's a no-brainer in my opinion.
Final 5 Tips
- Make your investment before the 5th of each month. If you are doing an online transfer, do it 2-3 days prior to 5th.
- Don't withdraw unless you absolutely need it. Remember, that the interest you earn is tax-free and you can't simply deposit the money back as there is an overall deposit limit of 1.5 lakhs/year
- PPF is a good fit as a replacement for long term debt in your financial portfolio, not so much for short term investments.
- If you decide to extend without any further contributions, you can't simply go back and change the option to make fresh contributions. So, in my opinion, you should always go for extension with an option to make future contributions.
- Finally, when in confusion, refer to the official PPF rulebook. A copy is available here
All in all, PPF is a great long term investment vehicle and it should be an essential part of your financial portfolio. In fact, I strongly recommend it to all my friends.
If you have more questions, let me know.