Public Provident Fund is a savings scheme about which everyone talks while discussing savings, investments or taxes. But do you know all the details about it? Should you invest your hard-earned money in PPF? Let’s discuss this.
Aware of the details? Check our opinion on PPF at the end.
Estimated read time: 4 minutes and 19 seconds
Buckle up, here we go!
What is a Public Provident Fund Scheme?
Launched in 1968, the Public Provident Fund (PPF) is a government-backed savings-cum-tax-saving instrument in India.
PPF is a 15-year savings scheme. Only Indian residents can open a PPF account. Currently, the fund offers an interest rate of 7.1% compounded annually.
We can open a PPF account at any post office, Government or private bank. Some banks allow you to open a PPF account online as well.
How does the PPF scheme work?
Let’s say you opened a PPF account on Nov 1, 2022.
For 15 years, you have to deposit a minimum amount of ₹500 and a maximum amount of ₹1.5 lakhs. This is mandatory.
If you miss out on the deposit, the account will be deactivated. And to re-activate, you need to pay a penalty of ₹50 plus the minimum deposit amount of ₹500 for each year of default.
One thing to remember is that the maturity date is not calculated from the date of opening the account but from the end of the financial year in which you make the first deposit.
Let’s say you opened the account on Nov 1, 2022. Your 15-year period starts on March 31, 2023, and matures on April 1, 2038.
Initially, the fund gave an interest of 4.8%. And at one time, the interest rate was 12%, but currently, it earns an interest rate of 7.1%. You can check the history of this here.
The interest rate offered on the PPF is not fixed, but they linked it to the 10-year government bond yield. The rate doesn’t change on a day-to-day basis but is fixed at the beginning of a quarter based on the average bond yield in the previous three months. So there are good chances of lower interest rates if the bond rate goes down.
After 15 years, you can withdraw your tax-free corpus from the account.
Also, a court order or decree cannot be attached to a PPF account. Lenders can not realise the PPF balance for the payment of a debt or liability. However, this rule does not apply to income-tax authorities.
Can you extend your PPF account?
Yes. After 15 years, you can keep extending your PFF account for a block of 5 years in two ways.
If you want to extend your account to keep investing more every year. You need to inform the bank/post office within one year before the maturity date.
And suppose you fail to close your account at maturity or inform them about the extension. Your account will be automatically extended, but you won’t be able to make any new deposits. Your corpus will still earn interest every year.
Eligibility criteria to open a PPF account
Only Indian residents can open a PPF account. No joint accounts. We can open only one PFF account for ourselves.
Even though you are allowed to open a separate account on behalf of a minor (your kids). The maximum amount you can deposit in both accounts jointly is ₹1.5 lakhs.
How can you withdraw your savings?
There is a lock-in period of 15 years, and you can withdraw the money in full after its maturity period.
However, pre-mature withdrawals can be made from the start of the 7th year. You can only withdraw 50% of the balance in the account as of at the end of the 4th year or the end of the previous year, whichever is lower.
Pre-mature closure of the PPF account is allowed after the completion of 5 years for medical treatment of family members and for the higher education of the PPF account holder. However, pre-mature closure comes with an interest rate penalty of 1%.
If you have extended your account, you can make one withdrawal every year. But the total withdrawal amount in the 5-year block cannot exceed 60% of the balance available at the start of the extension period.
Loan against PPF
You can take a short-tenure loan against your account balance between the 3rd and the 6th year. They capped the loan amount at 25% of the previous two years’ closing balance.
They charge these loans 1% higher than the prevailing PPF interest rate. That means if the PPF interest rate is 7.1%, the loan rate would be 8.1%.
Also, you need to repay this loan in 36 months.
Tax benefits on PPF
Public Provident Fund comes under the EEE (exempt, exempt, exempt) category.
Deposits made towards this scheme are eligible for a tax deduction of up to ₹1.5 lakhs in a financial year under Section 80C. Remember, this is the same section which provides a deduction for investments in ELSS, SSY, EPF, insurance, etc.
Interest earned in this account is also exempt from tax under Section 10 of the Income Tax Act.
Therefore, you don’t have to pay any tax upon maturity/withdrawal.
Should you invest in the Public Provident Fund?
We should always take investment decisions based on our goals, risk appetite, financial situation, etc.
After looking at the tenure, interest rate, tax benefits, etc. We can say PPF is a good savings scheme. But this is not an investment scheme.
If you lack financial discipline, please save money in the PPF scheme. Because saving somewhere is better than not saving at all.
We say this because 15 years is a very long time. And if you want to invest for a long-term goal, you need better returns than just ~7%. You won’t be able to beat inflation with this. That is why we wouldn’t recommend you invest in this scheme on a standalone basis.
But if you are an aggressive investor, and looking for some fixed-income fund to diversify your portfolio, PPF is great for you.
Also, if you are looking to save for your girl child, Sukanya Samriddhi Yojana is better than PPF. Read more about it here.
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