The Public Provident Fund, or PPF, is a government backed small-saving scheme. Though started in 1968 with the objective of providing social security during retirement to workers in the unorganized sector and for self-employed individuals, it has become a very popular tax-saving instrument.
Is the return assured?
The investor is assured a fixed return every year, though the exact amount is reset every quarter. Earlier, the returns would be set every year. Now, to keep it more market aligned, it is reset every quarter according to the yield on government securities.
Between 1986 and 2000, the return was 12% per annum. It kept dropping to touch 9% by February 2003. After that it fluctuated from a high of 8.8% to a low of 7.1%. Since April 2020, this has been the rate.
- Interest is calculated on a monthly basis
- Interest is paid on the lowest amount between the close of the fifth of the month and the last day of the month
- Interest rate is compounded annually
- Interest is credited to the account at the end of the FY
- Interest rate is visited every quarter, and may or may not be reset
Is it safe?
It is a sovereign-backed investment, which means it is issued by the national government of a country. Since the funds in PPF are backed by the central government, the investment does not get any safer than this because the government will not default in its payment. It stands for the highest safety.
Moreover, the amount in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder.
What is the tax benefit?
The amount invested is eligible for a deduction under Section 80C of the Income Tax Act
What’s more, even the interest earned is tax free.
It gets better. The interest is added to the principal investment and compounded, and the accumulated amount is also exempt from tax on maturity.
This makes it an EEE investment; which is an acronym for Exempt, Exempt, Exempt. It refers to the tax exemption at various stages. Tax break on investment (principal). No tax during the accumulation phase (interest earned). Zero tax at the time of withdrawal (accumulated amount).
Can I have a joint account with my children?
An individual can only have one PPF account in their name. No one can hold multiple accounts. Neither is a Hindu Undivided Family (HUF) eligible to hold one. Also, it not possible to have a joint account holder but the nomination facility is available.
In the case of death of the account holder, the account shall be closed. No nominee or legal heir can continue to deposit in the account. The PPF rate of interest shall be paid till the end of the preceding month in which the account is closed.
You can open an account in the name of a minor child of whom you are the parent/guardian. Let’s say you have a son, Ravi. Either you be the guardian for Ravi’s account or your spouse. But Ravi, can only have one account in his name. Having said that, your annual contribution stays fixed at Rs 1.50 lakh. You cannot put Rs 1.50 lakh in your account and another Rs 1.50 lakh in Ravi’s account. So while contributing to your account, you can also contribute to the PPF account of your minor son within the overall limit of Rs 1.50 lakh. The limit of Rs 1.50 lakh is per individual tax payer, not per account.
Do I have to invest every year?
Yes. You will have to invest every year over the period of 15 years.
Theoretically, the PPF comes with a lock-in period of 15 years. Technically, it is 16 years. The maturity date is not calculated from the date of the opening of account. Instead, the date of calculation of maturity is taken from the end of the financial year (FY is from April 1 to March 31) in which the deposit was made, irrespective of the month or date in which the account was opened.
Let's say you made your first contribution on August 26, 2013. The lock-in period of 15 years will be calculated from the March 31, 2014, and the year of maturity will be April 1, 2029. Even if you make your first contribution on March 1, 2014, the lock-in period of 15 years will be calculated from March 31, 2014, and the year of maturity will be April 1, 2029.
Over this period, you will have to invest every year. The minimum that you can invest in any FY is Rs 500. The maximum that you can invest is Rs 1,50,000. You can invest this at one time, or in instalments.
If you do not deposit the minimum amount of Rs 500 in a year, the account will be discontinued. To revive a discontinued account, you will have to deposit the minimum annual subscription (Rs 500) + the penalty (Rs 50 for each defaulted year).
Is my money locked over this period?
Premature closure is allowed after 5 years from the end of the year in which the account was opened subject to either of the following circumstances:
- Life-threatening disease of account holder/spouse/dependent children
- Higher education expenses of the account holder/dependent children
- The account holder has shifted abroad and there is a change of resident status
As a penalty, at the time of premature closure, 1% interest shall be deducted from the date of account opening.
On the other hand, if you hold the account till maturity and want to continue doing so, you can. The account can be extended in blocks of 5 years.
Loans can be availed between the 3rd and the 6th FY. However, the amount taken as a loan will cease to earn a return till it is repaid, along with interest. So you lose out on the tax-exempted interest and pay interest. So only if the need is urgent and you are in a position to replace it quickly, opt for it. Or else, it defeats the purpose of compounding.
A partial withdrawal facility can be availed from the 7th FY onwards.
Click here to see all the details on interest rate on loans and duration of loan permitted.
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Investments include risk and must always be made in conjunction with your overall portfolio and risk capability.
