Public Provident fund (PPF) is a long-term investment tool with a triple tax benefit. The invested amount, the earned interest, and the maturity amount – all three are tax-free.
National Savings Institute of Ministry of Finance, Government of India, first introduced the Public Provident Fund (PPF) scheme in 1968. The aim was to encourage investment which would give reasonable returns with income tax benefits. The government amended the system from time to time and recently changed it to Public Provident Scheme (2019) in December 2019.
This popular investment tool allows you to achieve long-term goals like building a corpus for your retirement or accumulate funds for your child’s higher education without worrying about taxes. PPF scheme is risk-free because it offers guaranteed returns at the end of 15 years.
Eligibility For A PPF Account
You can open a PPF account if you fulfil the following criteria:
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You are an Indian citizen. A minor can also open a PPF account under the guardianship of an adult.
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As per the Ministry of Economic Affairs, Non-Residents of India (NRIs) who opened their accounts before August 2018 can keep their account until the 15 years maturity period. However, NRIs are not eligible for opening a PPF account anymore.
Deposit in PPF Account
You require only Rs.500 to open a PPF account. Visit any bank or post office to open the account. You can open the account online as most banks nowadays offer online account opening and transaction facilities.
The maximum investment amount in a PPF account is Rs.1.5 lakhs per annum. The amount can be deposited at any time during the financial year as a lump sum amount or in instalments.
Interest Rate
The interest on PPF is fixed quarterly. At present, the interest on PPF is 7.10 % w.e.f October 2020. The interest on PPF is revised every quarter. The interest is compounded annually and is credited to the account on 31st March every year. The interest on PPF is not fixed but is assured. The interest is linked to the 10-year government bond yield. As per the PPF Rules, the interest is calculated on the minimum balance between the 5th and at the end of the month. So if you choose to make a monthly deposit towards PPF, you must deposit by the 5th of every month. It will ensure the maximum benefit of interest on your deposits.
Maturity And Withdrawals
PPF scheme has a lock-in period of 15 years. After attaining maturity, withdrawal can be made in the following manner:
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You can either close the account after withdrawing the entire amount, or
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You can opt for an extension of the scheme for 5 years. The extension is allowed for 5-year blocks and can be applied any number of times. You can extend the account either with or without a monetary contribution.
However, under certain exceptional circumstances, you can make a partial withdrawal from the PPF account after five years of opening the account. You can withdraw a maximum of 50% of the account balance standing at the end of the fourth year from opening the account.
Tax Implications And Benefits
The amount deposited (maximum Rs.1.5 lakhs per annum) to a PPF account is completely tax exempted under Section 80C of the Income Tax Act. The interest earned is also tax exempted. Also, the withdrawals, whether premature or amount obtained on maturity, are tax-free. PPF scheme comes under the tax category of EEE (Exempt, Exempt, Exempt).
Before opting for PPF investment keep two things in mind- its a long-term investment as there is a lock-in for 15 years and after such a long period the inflation-adjusted return on PPF may look a little less.
