Beginning your investment journey? Here’s why a PPF will help

Individuals are always looking out an investment scheme which is assists in providing good returns and at the same time helps to save taxes. Keeping in mind the need to encourage savings, the Government of India introduced the Public Provident Fund through the Public Provident Fund Scheme, 1968. It is commonly known as PPF. While the organized sector could reap the benefits of Employee Provident Fund or EPF, PPF was directed at the unorganized sector, private sector and businessmen. However, a person with an EPF account is eligible to open a PPF account.

Since its inception, PPF has remained one of the most popular long term saving-cum-investment option in India due to the attractive tax benefits. Given that it has the backing of the Government of India and also offers an attractive interest rates provide additional leverage to the scheme. It’s not surprising that a PPF account is one of the most sought after and commonly recommended investment option suggested by investment advisors. PPF is primarily a retirement focussed investment. By encouraging individuals to start saving early into their career and claim tax benefits, the ultimate goal of PPF is to secure the future. PPF is offered by all leading commercial banks in India as well as India Post.

This article will provide a detailed overview of PPF, including the features of PPF, benefits of investing in PPF, eligibility conditions, interest rates offered and some of the FAQs about PPF.

About the PPF Scheme

Salient features of the PPF scheme are as follows:

Amounts to be deposited: In a financial year, a subscriber must invest a minimum of Rs.500 and a maximum of Rs.1.5 lakh towards a PPF account.

Tenure: 15 years post which can be extended for a period of 5 years at a time and can be extended within one year of maturity. If the subscriber does not plan to make any fresh investments after maturity, the PPF account can continue earning interest on the available corpus until the end of maturity. Where fresh investments are made post maturity, new amounts deposited are added to the corpus, and the interest is calculated on the entire amount. Please note that in this case, withdrawals are restricted to a maximum of 60% of the amount in the PPF account, which is available at the start of each five-year period.

Modes of depositing amounts in the PPF account: Several options are available such as cash, cheque, PO, DD, online funds transfer. The subscriber also has the option to choose a one time deposit or through instalments through the financial year.

A number of accounts that can be opened: One individual is only allowed to open one PPF account. While PPF accounts can be opened either in a post office or in a bank, a subscriber cannot under any circumstance open accounts in both. To combine two PPF accounts under one name, the subscriber has to get the approval of the Department of Economic Affairs under the Ministry of Finance.

Deposits more than Rs. 1.5 lakh: Usually, subscribers will choose to not deposit beyond this limit in a PPF account because that amount does not earn any interest rate. Secondly, no tax exemptions are available for such amounts.

Transferring PPF accounts: It is possible to transfer PPF account from one bank to another bank or from one post office to another. To do so, the account at the previous place of operation needs to be closed. The money is transferred to target bank or post office. Please note that the transfer of PPF account has no effect on the original maturity date. The interest payment also remains unaffected by a transfer of the accounts.

Features of PPF Scheme

One of the key features of the PPF scheme is its withdrawal mechanism. A subscriber is not permitted to close a PPF account before its maturity which is 15 years.  In case the subscriber does not make the required deposits and the account becomes inactive, no withdrawals are permitted before the expiry of the tenure.

Once the tenure is completed, the amount and the interest accrued on the amount can be withdrawn freely. However, an exception has been made to allow partial withdrawals. If the money is required for any emergency (a life-threatening illness or for the purpose of higher education), PPF scheme allows partial withdrawals once the account has completed 6 years. However, the amount that can be withdrawn is capped at 50% of the total balance at the end of the fourth year (preceding four years from the year of withdrawal) or 50% of the total balance at the end of the year before the year of withdrawal, whichever is lower. Partial withdrawals are permitted only once in a financial year.

The other key feature of PPF is the various tax benefits offered by it. All deposits made towards a PPF account can be claimed as tax deductions under Section 80C of the Income Tax Act.  Interest earned on the deposits made are also not taxable. Amounts which are withdrawn from the PPF account on maturity are exempt from wealth tax.  The maximum limit of self and minor accounts which can be claimed as tax deduction is Rs.1.5 lakh per annum. Any amounts in excess of this limit are not eligible for tax deduction. Excess money is refunded to the investor without any interest on it.

Where the subscriber does not deposit the required minimum amount in a financial year in the PPF account, the account is discontinued. The subscriber is not allowed to withdraw any amounts prior to the completion of the maturity period. There is an option to revive an inactive PPF account by the subscriber by paying the penalty. If the PPF account is discontinued due to non-deposit of the required amounts, the subscriber loses the right to take a loan against the PPF account which is available after the completion of the 3rd year of the PPF account. Similarly, a discontinued PPF account does not have any option of partial withdrawals which are permitted after the 7th year of operation of the account, unless the account is revived.

You can also use a PPF calculator to which is an online tool to calculate the interest that they are earning if they are investing in the PPF scheme. The online calculator helps to calculate the  maturity amount, growth in investment, and the interest earned over the course of the 15-year investment. Based on the usage and parameters, there are seven different types of PPF calculators.

Benefits of PPF Scheme

When compared to other investment options, PPF has certain benefits which stand out. These have been summarized below:

What makes PPF a more desirable investment option over others is the nature of the investment. PPF is a completely risk free investment given the guarantee of the government of India backing the principal and interest.

The interest and the principal amount are also fully exempt from income tax. The interest income earned from other saving schemes such as National Savings Certificate or tax saving fixed deposits is subject to tax treatment. PPF is the only government scheme where the interest income is also tax exempt.

PPF also enables the account holders to take loans and make partial withdrawals depending on the age of the account and the balance on specified dates. This feature is different when compared to other investment options such as Tier I account of the National Pension Scheme where withdrawals are pegged to the age of subscriber and the amount of withdrawal is also mandated.

Additionally, investments in PPF are not subject to the performance of the stock market. PPF is arguably the best option to choose if the investor is looking for a secured investment option without any volatility in returns.

The flexibility offered by PPF for making investments provides unique benefits. While PPF does not require a mandatory investment every month, it is important to invest regularly to reap the maximum benefits. The best way to ensure regular monthly investment is to provide standing instructions to the bank. Without  mandatory monthly investments, one can end up making the investment on a need only basis which can deplete the total returns. Similarly, lump sum investments in PPF can also be beneficial. If there is surplus liquidity on account of bonus or inheritance, a wise way to invest the money would be to add it to the corpus in PPF.

As PPF is meant as an aid for the post retirement years, Government makes it very lucrative. The interest rate offered on PPF is higher than that offered by the Government for 10 year Government bonds. As a result, returns from PPF will never be less than the prevailing interest rates.

PPF is a safe investment option for another reason too – in the unlikely event of a court attachment on the assets of the investor, the PPF account cannot be attached.

How does PPF fare when compared to an instrument like ELSS? From the standpoint of maturity period, a PPF account matures in 15 years from the year in which the account was opened. The account holder has the option of renewing the tenure for a block period of 5 years beyond the maturity period. In contrast, ELSS has a mandatory lock-in period of three years. During this period, the subscriber cannot redeem or transfer the units to another scheme. For urgent needs, the subscriber has the option to liquidate investments. Other equity funds do not have any lock-in restrictions.

Interest rates of PPF

The interest for PPF is announced by the Government of India on an annual basis. The present rate of interest offered is 7.6% per annum (for FY 2017-18).

The interest rate is compounded annually. The amount is credited at the end of every financial year. Note that the interest is calculated on the basis of the interest rate announced for a particular financial year. Therefore, the rate of interest is not fixed for the entire tenure.  As noted in the previous paragraphs, the tax free interest income is a major attraction for investors.

It is advisable to deposit the investment amount by 5th of every month. The reason for that is the interest calculation – all amounts which are available in the PPF account before the 5th of a particular month are considered for calculating the interest. If you are looking to maximize your returns, the period of investment can play a huge role.

In case a subscriber dies during a year, his executors  are prohibited from depositing any sum from the income of the deceased to his PPF account after his death. If any such amount is deposited, then the amount does not get any interest. In case a subscriber ends up discontinuing investments into the PPF account, the available amount in the account will continue to earn interest till maturity. In the event a subscriber invests less than the minimum amount required in a PPF account, then such amount is not eligible to earn any interest as the PPF account will not be considered as a valid PPF account.

How to open PPF account

The following documents are required for opening a PPF account:

– Form A – This is the form is to be filled in by the subscriber who wants to open a PPF account. The form requires key particulars of the account holder such as name, address, PAN card and signature to be filled in. The amount which will be deposited in the account will also have to be specified. If the PPF account is opened in the name of a minor, the particulars such as the minor’s name, guardian’s name and relationship with the applicant will have to be filled in.

The account opening form is available at the branches of commercial banks or post offices.

– ID proof. Any of the following documents can be provided as an ID proof.
a) PAN card
b) Driving license
c) Voter ID card
d) Passport

e) Aadhaar Card

– A proof of residence

– Passport size photographs

– Pay-in-slip (available at the bank branch/post office)

– Nomination form – Please note that the facility to appoint a nominee is not available in Form A. A separate nomination form (Form E) is required to be filled. PPF scheme allows more than one person to be nominated for a single PPF account. The names of the nominees, their addresses and relation to the account holder must be specified in the nomination form. If there are more than one nominee, the share which can be claimed by each nominee needs to be specified. No nominations are allowed for the PPF account of minors.

Certain banks including SBI provide the option of opening PPF account online. In case a subscriber has a PPF account in a bank and wishes to transfer it to a post office or vice versa, the same is allowed.

Eligibility for PPF account

Any person who is resident of India is eligible to open a PPF account. Parents are allowed to open PPF accounts on behalf of minors. Opening a PPF account for your minor child can be beneficial for several reasons. Foremost, the lock in period of 15 years will be over till the time your child becomes an adult. This also means that your child will have an access to a corpus once he becomes an adult. There is a maximum limit of Rs.1.5 lakhs annually which would be applicable for contributions made in the minor’s account and the guardian’s account. However, grandparents are not permitted to open a PPF account in for their minor grandkids.

A non-resident Indian is not allowed to open a PPF account. In case a person has a PPF account in India and subsequently becomes a non-resident Indian, he or she is permitted to hold such account till maturity. In such a case, the NRI can make contributions to the PPF account through a NRO or NRE account.

No individual is permitted to have more than one PPF account. Joint PPF accounts are also not permitted.

No individual is permitted to open a PPF account on behalf of a Hindu Undivided Family (HUFs). Since 2005, HUFs are also not permitted to open PPF accounts. Any account opened by a HUF before May 13, 2005 can continue until maturity.

PPF maturity

A PPF account matures within 15 years from the year in which the account was opened. The subscriber has the option of renewing the tenure for a block period of 5 years beyond the maturity period. However, the subscriber must apply for an extension within one year of maturity. The entire corpus available upon maturity is tax-free. Upon the maturity of your PPF account, you can either choose to withdraw the entire corpus or extend the PPF account, with or without contribution. There is no limit on the number of times a subscriber can extend the PPF account.

Premature termination of PFF account of an individual or minor is permitted if the account has been in operation for five years and on specific grounds. These grounds are treatment of serious ailments of the account holder, spouse or dependent children or parents or for the higher education of account holder or the minor on whose behalf the account has been opened.

In case the subscriber fails to deposit the minimum amount in the PPF account in a financial year, the account becomes inactive, thereby affecting the maturity of the account. It is possible to activate the account by paying a penalty of Rs. 50 and a minimum deposit of Rs. 500 for every year the payment is missed.

PPF details online

With the advent of the digital age, opening a PPF account after visiting a branch of a bank physically has become the thing of the past. To increase the ease of access, banks now offer the facility of opening a PPF account online. A few simple steps are to be followed and you are all set with your PPF account. An online account allows you to view the statement at any time you wish to. The process of opening an online PPF account is the same for most commercial banks.

The advantage of opening an online PPF account is that the you receive access instantly. You must have hold a savings account with the bank where you want to open your PPF account. Make sure that the net banking facility is available on your phone. You will receive a OTP on the mobile number which is registered with the bank for internet banking transactions. This OTP will authorize you to open a PPF account instantly.

You also need to furnish your PAN number. Then you can select the option of ‘New PPF Account’ on your internet banking portal. You will also need to enter the bank account number from which contributions to the PPF account will be made. The full details of the branch of this bank along with the branch code needs to be provided. Then you will have the option of verifying your personal details as well as nomination facilities on the PPF account. Once these details are verified, you will instantly receive access to your online PPF account.

You will need to take a print out of the online application form and visit the nearest branch of the bank within 30 days. This is for the KYC check by the bank. If you are a preferred customer of a bank, you can also avail doorstep banking and handover these documents to an authorized representative of the bank.

FAQs

Is PPF a secure investment option?

The PPF account is one of the safest investment options given that it is backed by the security of the government of India. In fact, it is more secure than fixed deposit in a savings bank account. Even in case of an attachment on account of a court order, your PPF account remains safe.

Can I open a PPF account with a bank without opening a savings account in the same bank?

Legally, there’s no restriction. However, from a bank’s perspective, a standalone PPF account makes little sense. Savings account helps bank earn interest but a standalone PPF account does not.

Is the interest rate on an PPF account the same through the tenure?

Absolutely not. The interest rate for PPF account is revised every year. In fact, you get a better interest rate every year since the interest rate takes into account the inflation too.

How many partial withdrawals are permitted in a year from the PPF account?

You are only permitted to partially withdraw once a year.

I’m the nominee for my mother’s PPF Account. Upon my mother’s demise can I operate her PPF account?

PPF accounts cannot be operated by nominees on the death of the subscriber though the corpus will earn interest till closure. On the demise of the account holder, the nominee is required to close the PPF account by submitting Form G with the bank or post office, as the case may be.

Can I change my surname that appears for my PPF account after marriage?

A female subscriber may do so by requesting for a change in surname by submitting marriage certificate.

Can I transfer my PPF account to my husband?

PPF accounts are non-transferable in nature.

As a grandparent, can I open a PPF account for my grandkids?

 Only parents of minor kids are permitted to open a PPF account in their names. You can give the money to the parents who can in turn open the account.

What happens to the corpus in the PPF account if the subscriber passes away before maturity?

If the subscriber has a nominee, the nominee will receive the entire amount. Where there are more than one nominee, each nominee will receive the proportionate share as has been indicated in the nomination form by the subscriber.

If I deposit money in my wife’s PPF account, who is eligible for tax deduction?

The person making the contribution is eligible for tax deductions under Section 80 C of the Income Tax Act.

Is it possible to make withdrawals from the PPF account in addition to taking out a loan against the PPF account?

Withdrawals and loans are exclusive of each other. A subscriber can avail the loan facility between the 3rdand the 6th year of operating an active PPF account. Partial withdrawals are permitted only once the account is in the 7th year of operation. Therefore, loans and withdrawals will have to be made in accordance with the time period suggested.

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