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Public Provident Fund (PPF) was introduced in India in 1968 with the objective to mobilize small saving in the form of an investment, coupled with a return on it. It can also be called a savings-cum-tax savings investment vehicle that enables one to build a retirement corpus while saving on annual taxes.
What is a PPF scheme?
Public Provident Fund scheme is a long term investment option which offers an attractive rate of interest and returns on the amount invested. The interest earned and the returns are not taxable under income Tax. One has to open an PPF account under this scheme and the amount deposited during a year will be claimed under section 80C deductions.
How to open a PPF account?
A PPF account can be opened with either a Post Office or with any nationalized bank or private authorised by RBI. You need to submit the duly filled application form along with the required documents i.e. the KYC documents like identity proof, address proof, and signature proof. Post submitting these documents you can deposit a prescribed amount towards the opening of the account.
Essential features of PPF
- Tenure: The PPF has a minimum tenure of 15 years, which can be extended in blocks of 5 years as per your wish.
- Investment Limits: PPF allows a minimum investment of Rs 500 and a maximum of Rs 1.5 lakh for each financial year. Investments can be made in lump sum or in a maximum of 12 instalments.
- Opening Balance: The account can be opened with just Rs 100. Annual investments above Rs 1.5 lakh will not earn interest and will not be eligible for tax saving.
- Deposit Frequency – Deposits into a PPF account has to be made at least once every year for 15 years.
- Mode of deposit – The deposit into a PPF account can be made either by way of cash, cheque, Demand Draft or through an online fund transfer.
- Nomination – A PPF account holder can designate a nominee for his account either at the time of opening the account or subsequently.
- Joint accounts – A PPF account can be held only in the name of one individual. Opening an account in joint names is not allowed.
- Risk factor – Since PPF is backed by the Indian government, it offers guaranteed, risk-free returns as well as complete capital protection. The element of risk involved in holding a PPF account is minimal.
- Who can invest in PPF – Any Indian citizen can invest in PPF. One citizen can have only one PPF account unless the second account is in the name of a minor. NRIs and HUFs are not eligible to open a PPF account.
Loan against PPF – You can take a loan against your PPF account between the 3rd and 5th years. The loan amount can be a maximum of 25% of the 2nd year immediately proceeding the loan application year. A second loan can be taken before the 6th year if the first loan is repaid fully.
PPF withdrawal
As a rule, one can close a PPF account only upon maturity i.e. after the completion of 15 years. Upon completion of 15 years, the entire amount standing to the credit of an account holder in the PPF account along with the accrued interest can be withdrawn freely and the account can be closed.
However, if account holders are in need of funds, and wish to withdraw before 15 years, the scheme permits partial withdrawals from year 7 i.e. on completing 6 years.
What are the tax benefits of investing in PPF?
PPF is one investment vehicle that falls under the Exempt-Exempt-Exempt (EEE) category. This, in other words, means that all deposits made in the PPF are deductible under Section 80C of the Income Tax Act. Furthermore, the accumulated amount and interest is also be exempt from tax at the time of withdrawal.
It is important to note that a PPF account cannot be closed before maturity. A PPF account, however, can be transferred from one point of designation to another. But, do remember that a PPF account cannot be closed prematurely. Only in the case of the account holder’s demise can the nominee’s file for the closure of the account.
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