The Public Provident Fund (PPF) is a widely favoured investment option among investors due to its range of investor-friendly features and benefits. Its popularity stems from several factors, including guaranteed returns, tax benefits on invested amounts, and tax-free returns on maturity.
Understanding Public Provident Fund (PPF)
PPF, or Public Provident Fund, is a government-backed savings scheme that carries along many benefits. This is one of the most popular tax-effective savings schemes in India, which are targeted towards saving and securing finances.
This is a long-term investment scheme with a maturity period of 15 years, offering guaranteed returns. The government reviews its interest rate every quarter, allowing for potential adjustments. At present, the PPF offers a 7.1% interest rate.
| Interest Rate of PPF | 7.1% per annum |
| Tax Benefit | Up to Rs 1.5 Lakh under Section 80C |
| Risk Profile | Offers guaranteed, risk-free returns |
| Minimum Investment Amount | Rs 500 per annum |
| Maximum Investment Amount | Rs 1.5 Lakh per annum |
| Tenure | 15 Years |
| Eligibility | Open to all individuals, including salaried and self-employed |
| Loan Against PPF | Loan facility available from the 3rd to 6th Financial Year |
| Withdrawal Pattern | Partial Withdrawal allowed from the 7th Financial Year, Subject to Conditions |
Why is PPF Important?
PPF is less risky, so it is apt for conservative investors looking for long-term investments that offer tax-free benefits.
The program helps the participant build a huge amount of capital that can be used to plan for retirement, to sponsor children’s education or to buy a house. The investors can also claim benefits under Section 80C to the extent of Rs 1.5 lakh and also enjoy the tax-free interest earned and maturity amount.
A PPF account is useful to someone who saves, invests, and makes future plans earning the returns under the protection of a government’s saving scheme with tax appropriate to that saving.
Key Features Of A Public Provident Fund (PPF) Account:
- Investment Tenure: PPF has a locking period of 15 years. Nevertheless, the date for maturity could be more than 15 years as well since it is computed starting from the end of a financial year when the initial investment has been done. Besides that, you are able to increase your period for the PPF by increments of 5 years. And this may also be without adding more into it. Thus, this can extend up to a term of 20 years, 25 years, and 30 years or so.
- Risk Factor: PPF is a Government-guaranteed scheme, giving definite returns and hence extremely risk-free.
- Nomination: The PPF account facilitates a nomination facility through which you can nominate one or more persons to receive your PPF account in case of death.
- Mode of Deposit: Money can be deposited into the PPF account online and offline. Offline deposits are allowed through cash, cheque, and demand draft. Online deposits can be transferred through net banking or mobile banking.
- Deposit Frequency: Deposit can be made any number of times you want. Hence, no limit is determined for how many times in a year you can invest in the PPF accounts. It is, however, considered essential that at least a contribution be made once per year for the account to continue being active.
- Opening Balance: One can open a PPF account with a minimum balance of Rs 100. But it is essential to deposit a minimum of Rs 500 every financial year for account maintenance.
- Investment Limits: The minimum investment for the PPF is Rs 500 per financial year; the maximum amount you may deposit is Rs 1.5 lakh per financial year.
PPF Account Opening Process:
Offline Account Opening: To open a PPF account offline, visit a bank branch that offers PPF accounts. Obtain and complete the PPF account opening form with your details, and submit it with KYC documents (photographs, ID proof, and address proof) along with the initial deposit. Once the bank verifies your application and documents, your PPF account will be opened.
Online Account Opening: Leading banks like SBI, HDFC, ICICI, and Axis offer online PPF account opening. You can fill out the application form online, upload KYC documents, and make the first deposit directly. After the bank reviews and verifies your details, your PPF account will be opened online.
Tax Benefits Of Public Provident Fund (PPF):
Contributions made towards PPF scheme qualify for ‘Exempt-Exempt-Exempt’ (EEE) status. The vested funds are entitled to a tax deduction under section 80C of income tax act, thus enabling claims up to 1.5 lakhs of the amount invested as principal towards the PPF.
The second exemption applies to the interest earned, which is tax-free. The third exemption covers the maturity proceeds, which are exempt from Capital Gains Tax and Wealth Tax.
The EEE benefits remain valid even if a subscriber makes partial withdrawals or closes the account prematurely, ensuring proceeds are tax-free in those cases.
Nonetheless, a fresh regulation that was enacted in 2020 provides that withdrawal from small saving schemes such as the PPF exceeding Rs 20 lakhs may incur a Tax Deducted at Source (TDS) of between 2% and 5%. This TDS is, however, applicable in a situation where the subscriber doesn’t declare his or her income for more than three years.
Withdrawing Funds From Your PPF Account:
PPF has a lock-in period of 15 years, meaning you can withdraw your total corpus only after this period at maturity.
If you need funds before maturity, partial withdrawals are allowed under certain conditions:
You can request a withdrawal only after completing 5 financial years, excluding the year of your first deposit. This means you can make withdrawal requests starting from the 7th year. You are allowed only one withdrawal request per financial year.
You may take out a maximum of fifty percent of the entire balance at the close of the financial year at the end of the preceding fourth financial year from your application, whichever is lower.
PPF account holders can start making partial withdrawals from the fifth financial year of their account’s operations.
Form C is the withdrawal request form for PPF accounts. To withdraw partially, you need to complete Form C and submit it to your branch with the required documents. The form has three sections:
Declaration Section: Here, you provide your PPF account number, the amount you wish to withdraw, and the number of years the account has been active.
Office-Use Section: This section is filled out by bank officials and includes details such as the account opening date, previous withdrawal date (if any), current total balance, total withdrawals made, date of initial subscription, and the amount approved for withdrawal.
Bank Details: This section contains the bank account number where the withdrawal amount will be credited.
Drawbacks Of Public Provident Fund (PPF)
There are some limitations to consider before investing in a PPF account:
Lock-in Period: The investments in PPF are 15-year-long ones. It is not for those looking to invest for short periods and assured returns, like say FDs.
Not-so-Good Returns: PPF return tends to lag inflation. Currently, the interest rate stands at 7.1%, barely a percentage point better than India’s average annual inflation rate of 6% over a decade now.
Limit on Maximum Investment: You cannot invest more than Rs 1.5 lakh per financial year, which may hinder those wanting to build a larger corpus through PPF.
Withdrawal Restrictions: You can only withdraw from your PPF account starting in the seventh financial year after the account is opened.
Eligibility: Only Indian residents can open a PPF account. Non-Residents Indians (NRIs), Hindu Undivided Families (HUFs), and trusts are not eligible.
Conclusion
The guaranteed returns and tax-saving benefits have made the Public Provident Fund (PPF) a popular choice in India. Although declining interest rates have prompted many to explore alternative investments, the PPF remains one of the top tax-saving investment options in the country.
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