The Buyt Desk
Public Provident Fund (PPF) is a Government scheme that can help you to generate wealth for the future. Every Indian, even a minor, can open a PPF account. However, NRIs are ineligible to invest in PPF. You can deposit Rs.500 to Rs.1.5 lakhs in a financial year in the PPF account. The current rate of interest for the PPF scheme is 7.1%. The Government announces the rate of interest every quarter. The scheme locks in the funds for a period of 15 years. Partial withdrawal (50% of the corpus in the last financial year) is possible after 5 years of opening the PPF account.
Advantages of PPF
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It is a risk-free investment because it is a Government-backed scheme and provides assured returns after its term.
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It allows you to accumulate wealth for long-term financial goals like retirement or a child’s education.
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Under Section 80C of the IT Act, you can receive a tax benefit of up to Rs.1.5 lakhs by investing in PPF.
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In PPF, capital, interest, and withdrawal amount are tax-free. It is an investment under the EEE (Exempt-Exempt-Exempt) tax category.
Disadvantages of PPF
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The interest rate is not so high. PPF cannot counter inflation in the long run.
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There is an annual capping of Rs.1.5 lakhs on the capital amount.
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You cannot open a joint PPF account.
Options after completion of lock-in period
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You can close the PPF account and withdraw the corpus.
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You can extend the account for 5 years without making further contributions. The extension of the PPF scheme is possible in blocks of 5 years as many times as you want in a lifetime. In case of extension without a contribution, the accumulated corpus continues to earn interest. If you have not given maturity instructions to the bank or the post office, this will be the default option. It is best to opt for this option if you do not need the money urgently. However, you can still make one withdrawal every financial year. The withdrawal amount is not fixed.
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You can also extend the account for 5 years with a yearly contribution. In this option, you can withdraw only 60% of the accumulated corpus that was available before the start of the extension period. The withdrawal is possible once in a financial year. You are at a huge disadvantage if you forget to instruct the bank or the post office about this option. Depositing funds in the PPF account without providing instructions will result in no interest accumulation on the contributions. Moreover, they will not earn a tax benefit under section 80C of the Income Tax Act. You need to fill form H to extend the PPF account for 5 years with the contribution. You can give this instruction till the lapse of a year from the date of maturity. In absence of maturity instructions, you have to withdraw and close the account, or the bank will extend it for 5 years without any contribution.
At the end of 15 years, unless you had a specific financial goal, you should extend the PPF scheme. The corpus will keep earning interest and stay safe. The power of compounding is the best part of an investment. PPF makes it better because the interest is also tax-free.
