PUBLIC PROVIDENT FUND (PPF)

PUBLIC PROVIDENT FUND (PPF)

Introduction

Public provident fund (PPF) is a long-term saving scheme established by the central government of India.

It is safe, tax deductible investment with attractive returns and are fully exempted from income tax.

Income Tax Benefits in PPF

With effect from 01-April-2020, It depends on whether you choose old tax system or new tax system.
Old tax system: Deposit amount up to Rs.1.50 lakhs in a FY qualify for tax deduction under section 80C of Income Tax Act. Interest earned and withdrawals are completely tax free. Maturity amount is also tax free. It means the amount in PPF is totally exempt from wealth tax.
New tax system: The deposit amount would not get any deduction under section 80C of Income Tax Act. Rest is same as old tax system.

Eligibility

Individual of Indian resident can open only one PPF account under his name in post office or bank, however can open another PPF account on behalf of a minor child or a person of unsound mind of whom he is the guardian.
No joint account is allowed.
NRI are not eligible.
With effect from 13-May-2005, HUF can not open a PPF account. Account opened before this date can be continued till maturity but not be extended further.

Deposit Amount & Best time to Deposit

Minimum amount per financial year is Rs.500, while maximum deposit per financial year is Rs.1.5 lakhs.
Deposit amount should be in multiple of Rs.50 and deposit can be made in one lump sum or in installments in a FY.
There is no limit on the number of installments in a month or FY.
The maximum deposit limit is for both individual self-account and account of minor of whom he is the guardian, taken together.
Best time to deposit is beginning of the FY which earns more interest.

Interest and Interest Rate

Current annual interest rate is 7.10%. However, it is not fixed and is determined by the central government from time to time. From 01-April-2016 onwards, interest rate is announced on a quarterly basis. Earlier it was on yearly basis.
PPF accounts compounds annually and interest earned every month during the financial year will be credited at the end of the FY (on 31 March).

Loan & Withdrawal facility

Loan facility is available from 3^rd FY to 6^th FY of opening of the account if account is active. The eligible loan amount is 25% of the account balance at the end of 2^nd financial year immediately preceding the year in which the loan is applied for.
The repayment of principal amount can be made in one lump sum or in a maximum 36 monthly installments. Once the principal amount is fully paid then the loan interest to be repaid within 2 monthly installments.
The ROI on loan will be 1% per annum above the applicable PPF interest rate. However, in case of loan principal is partly paid or not paid within the 3 years then the outstanding loan principal amount will be charged at 6% per annum above the applicable PPF interest rate.
One can be eligible for only one loan in a FY even if he has already repaid his existing loan.
Withdrawal: Partial withdrawal is allowed from 7^th FY of opening the account and only one withdrawal is allowed per FY if account is active. Withdrawal limit is 50% of the account balance standing at the end of 4^th FY immediately preceding the FY of withdrawal OR at the end of preceding FY, whichever is lower.

Maturity period, Extension and Closure

Maturity period is 15 FY. However, PPF account can be extended even after the maturity period and extension can be with deposit or without deposit.
The extension period can be for a block of 5 FYs and there is no limit on the number of blocks. During the extended period, one withdrawal is allowed per FY. However, the total withdrawal limit during the extended 5-year block should not exceed 60% of the account balance at the start of the extension period.
Closure: Premature closure is allowed in genuine conditions like medical treatment of life-threatening disease, for higher education of children, resident change in another country. And it is allowed from the 7^th FY of account opening.
Penalty for premature closure is 1%, means interest will be calculated less than 1% than the interest rate applicable.

Nomination facility

It is available; however, nomination cannot be made on the account opened on behalf of minor.