Public Provident Fund





What is Public Provident Fund?

In the year 1968, the Ministry of Finance (MoF) introduced a savings-cum-tax saving instrument, the Public Provident Fund (PPF). For claiming tax deductions, one can account the deposits that he or she has made in the PPF account. That’s not all. The interests earned on these deposits are nontaxable. Thus, Public Provident Fund is considered as one of the most effective tax saving avenue in India. 

Eligibility

  • Any citizen who is a resident of India and is 18 years old or above can open a PPF account.
  • One person can open only one PPF account. 
  • Parents can open a PPF account for their children who are minors. 
  • Required Document: KYC documents such as address proof, identity proof, signature proof, photographs, and account opening form. 

How it works

  • To open a PPF account, one needs to visit a bank or the post office. 
  • Minimum amount of Rs 100 is required to open the account. 
  • The minimum deposit amount in a year is Rs 500. These deposits can be made in one single time or in a maximum of 12 installments per year. 
  • Deposits must be made every year for maintenance of the PPF account. 
  • The interest on a PPF account is calculated by compounding annually on the balance in the account, which is the lowest between 5th and the last day of that same month. To make the most of it, deposit of the amount is suggested to be made within the 5th of a month.
  • Current PPF interest rate is 7.9% w.e.f 1st April 2017. 

Maturity and Withdrawal

  • The maturity period of a PPF account is 15 years. 
  • One can opt for extension for 1 or more blocks of 5 years each. It is important to note that the subscriber needs to apply for extension within 1 year of the maturity. 
  • The user can also choose to withdraw his or her PPF account after 15 years. 
  • Premature closure before 15 years is not allowed normally. In case of medical emergencies or educational reasons, one can make a premature closure after 5 years, with a written application and supporting documents.

Advantages

  • The nominal minimum deposit of Rs 500 is very handy. 
  • The fact that the maturity period is 15 years ensures that your money grows efficiently, without any hindrance. 
  • Interest rate is fixed and guaranteed and always higher than the normal bank deposits.
  • Deposited amount upto Rs 150,000 is deductible from income under section 80C.
  • Entire amount at maturity is tax free.
  • Can avail loan against PPF in case of emergency.

Limitations

  • One of the major disadvantages of PPF account is that money cannot be withdrawn from a PPF account until the completion of 15 years (or 5 years for special cases). 
  • Joint accounts are also not allowed in PPF unless one is opening a PPF account with a minor. 
  • The maximum limit of deposit for a year in a PPF account is Rs 1.5 lakh. Any excess amount deposited won’t earn any interest. 
  • NRIs cannot open a fresh PPF account.
  • Interest rate is set by the Ministry of Finance, which is decreasing year after year.

Even though it is a long-term investment, the benefits that one can obtain from PPF is astounding. One can avail exemption of tax for both the deposits and interest on those deposits in the PPF account. Nothing beats PPF if one wants money growth, tax benefits, loans, returns which beat inflation. PPF is a great financial instrument for those who are less risk taker, towards savings for any financial goal.

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