What is Public Provident Fund or PPF? A detailed analysis

The Public Provident Fund or PPF is one of the popular and safe investment options in India. Most people take the plan to achieve their long term goals and also as a retirement solution.

Everyone wants a comfortable retirement life. For example, retirees like to spend their time with their family, go on an extended vacation, hang out with friends in the park, meet their day-to-day expenses, and the increasing cost of medical treatments. However, a small percentage of people can achieve this. Due to advances in medical science, people’s average life span is increasing day by day. For example, the average life expectancy in India has reached 69.73 years, according to macrotrends.net. It is close to 70 years.

However, it is just an average figure. It is not uncommon to see people living beyond 90 years. It means three more decades after retirement. Unlike developed countries like the USA, where social security covers all working population, India does not have such type of solid plans for its retirees. Thus, it becomes an individual responsibility to plan for retirement well in advance.

These are some of the popular retirement products in India: – 

  • Public Provident Fund (PPF)
  • Employees’ Provident Fund (EPF)
  • National Pension Scheme (NPS)
  • Atal Pension Yojana (APY)
  • Pension plans provided by Banks and Insurance companies

However, we will focus on Public Provident Fund in this post. Let’s begin.

What Is Public Provident Fund?

Public Provident Fund or PPF is a long term saving scheme sponsored by the Central Government of India. It is tax-friendly. Further, it comes with attractive interest rates. These are some of the features that make it a must-have long term plan for risk-averse investors. Let’s discuss all of its features and rules in simple language.

Who Can Open A Public Provident Account?

Any Indian citizen who is 18 years or above can open a PPF account. However, Hindu Undivided Family or HUFs are not eligible to open a PPF account. Similarly, NRIs are not eligible to open a PPF account. However, they can continue their contribution if they had opened the account when they were resident Indians. There is a misconception among people that only Central or State Government Employees can open a PPF account. However, it is not valid.

There is also an option for a minor account. The legal guardian, father, or mother of a minor can also open a PPF account. However, the account can be maintained only by a guardian until the minor becomes 18 years old.

There is also a restriction on the number of accounts one can open. One person can open only one PPF account. Further, there is no option for a joint account. But, the nomination facility is there. People who have registered under the General Provident Fund (GPF) and Employees’ Provident Fund (EPF) can also open a PPF account.

Where To Open The Account?

You can open a PPF account in the head post offices, State Bank of India and its associate banks, any nationalized bank, and some private banks. Further, some of these banks also receive online applications. To open an account, you need Form-1 and a minimum amount of Rs 500.

The Documents Required To Open The Account

You need an account opening Form (Form-1), an ID proof, an address proof, two current passport-sized photographs, a cheque, or ‘Pay-in-Slip Form’ to transfer the amount to your newly opened PPF account. You have to self-attest all the copies of the original documents and produce the original documents for verification. Further, a minor account needs a birth certificate as age proof.

Maximum And Minimum Contribution

The minimum deposit required per year is Rs 500, and the maximum amount allowed is Rs 1,50,000. However, if you are a minor account guardian, both the accounts will be treated as one. So, the maximum amount you can contribute to both accounts is restricted to Rs 1,50,000 per financial year. Further, the deposit amount should be in multiples of Rs 50. For example, you can deposit Rs 500, Rs 550, or Rs 600, but amounts equal to Rs 510, Rs 620, etc. are not allowed. You can deposit up to the maximum permitted amount (Rs 1,50,000) either in the form of a lump sum or in installments. Further, there is no limit on the number of payments in the financial year.

Interest On PPF Account

It is a debt instrument. However, you will not get an assured return rate as the government of India changes the rate of interest quarterly. It means the rate of interest can go in any direction during a financial year. The current interest rate is 7.1%, but as we discussed, it changes from time to time. It is interesting to note that during 1986-2000, the rate of interest was 12%. Since January 2000, the rate of interest is in a descending mode and has reached 7.1% now. However, it is still paying the best rate of interest when compared with other financial products.

Interest is calculated at the end of each calendar month. However, deposits made after the 5th day of a month does not earn interest until the end of the month. Therefore, it is wise to deposit your monthly installments on or before the 5th day of each month. Though the interest rate is calculated monthly, the interest amount is credited to your account on 31 March of each year. Thus it has an annual compounding frequency.

Public Provident Fund Maturity Period

The PPF matures after full 15 financial years. You can withdraw the total amount after completion of 15 years. Further, you can extend it with or without contribution. You can continue it for the next five years or multiples of 5, e.g., ten years, fifteen years, etc. However, you have to apply one year before maturity to avail of the benefit of extension. You can take advantage of the power of compounding once you extend the maturity period.

To take an example, suppose you deposit Rs 10,000 per month for a full 15 years. As the interest rate changes every quarter, I am taking a 6% annualized interest rate as an example. It means you deposit Rs 18 Lakh during the term, but you will get Rs 28.83 Lakh at maturity. The total interest amount is Rs 10.83 Lakh. However, if you are still working at the time of its maturity and decide to extend it with the same amount for another ten years, your maturity amount becomes Rs 67.97 Lakh. The total interest earned is Rs 27.13 Lakh.

Similarly, if you don’t need the full amount at the time of maturity, you can also extend it without payment. It is interesting to note that you can withdraw any amount once in a financial year. This way, you can earn interest on the balance amount.

Premature Withdrawl Facility

You can close your PPF account prematurely but on certain conditions. The conditions are as follows.

  • Medical treatment of life-threatening disease (You, your spouse, dependent children or parents)
  • Higher Education (You or your dependent children)
  • Change in the residential status (For example: – Resident Indian to Non-Resident India)

However, you are eligible for partial withdraw after five years from the end of the financial year in which the PPF account was opened. For example, if you have opened a PPF account on 30 June 2020, you are eligible to partial withdraw on or after 01 April 2026 only. However, you have to pay the penalty for that. You will get 1% less than the declared interest rate for the period. Thus, it is better not to withdraw the amount prematurely if you can manage it some other way.

Loan Agnaist Public Provident Fund

The loan facility is available from the 3rd financial year to the 6th fiscal year of opening the account. Further, you have to repay the loan in three years. The maximum loan amount is 25% of the balance amount in your PPF account by the end of 2nd financial year preceding the year in which loan is applied. Further, the loan rate will be 1% higher than the PPF interest rate during the term.

It is important to note that if you don’t repay the loan on time (in 36 months), you have to pay 6% more than the PPF interest rate during the same period on your outstanding balance. Further, you are not eligible for another loan.

Dormant Account

As you know, the minimum deposit amount is Rs 500 in a financial year. However, if you are unable to deposit the minimum amount, your account becomes dormant or inactive. Then, you have to pay Rs 50 per financial year of default and also the minimum amount of Rs 500 to reactivate it. It is interesting to note that a dormant account even earns interest. But, you cannot take a loan against an inactive account.

Income-Tax Benefits

Public Provident Fund is tax-friendly. It falls under the EEE (Exempt, Exempt, Exempt) regime of tax. Let’s understand what EEE means. Every investment has three stages.

  • Investment Phase
  • Accumulation Phase
  • Withdrawal Phase

You don’t have to pay any tax during any of the above phases. For example, you can claim tax benefits for a deposit amount of up to Rs 1,50,000 per financial year under section 80(c) when you choose the old tax system. However, there is no such provision under the new tax system, w.e.f. 01 April 2020.

Further, you are not taxed for the interest earned in your PPF account during the term. You also don’t have to pay any tax on the withdrawal amount at the time of maturity. Thus, your deposit amount, the interest earned, and the withdrawal amount is tax-free. It is one of the best features of PPF so far. In addition to the Public Provident Fund, here is a list of other financial products that enjoy the EEE benefits.

  • Sukanya Samriddhi Account (SSA)
  • National Pension Scheme (NPS)
  • Employees’ Provident Fund (EPF)
  • Unit-Linked Investment Plans (ULIPs)
  • Some Corporate and Government-backed bonds

Account Transfer

You can transfer your Public Provident Fund account in the following ways.

  • One bank to another bank
  • One post office to another post office
  • One bank to another post office and vice-versa

However, the PPF account cannot be transferred from one person to another.

Death Of Account Holder

In case the account holder dies before the maturity, the nominee or legal heir can claim the amount. The nominee needs to fill up the ‘Form G’ and submit it along with the death certificate and PPF passbook of the account holder. If there is no nomination, the legal heir can also claim the amount with a legal heir certificate or a copy of the will and the previously mentioned documents.

Pros Of Public Provident Fund

  • It is a safe investment option as backed by the Government of India
  • It is easy to open an account and also maintain it
  • The minimum amount is just Rs 500
  • It earns a decent return when compared with other plans
  • The investment is safe from any personal liabilities
  • It falls under the EEE tax regime

Cons Of Public Provident Fund

  • The rate of interest is going down since January 2000
  • It is difficult to beat the rate of inflation in the long run
  • It locks your money for the next 15 years
  • You have to pay penalties for premature withdrawal
  • You can close the account on some predefined conditions only
  • Only one account is allowed
  • The maximum amount is Rs 1,50,000 per financial year

A Closing Thought

The Public Provident Fund or PPF is one of the most popular retirement products in India. It is also the safest option. Further, anyone can participate as the minimum required amount is minimal. However, two things make it stand out from its competitors. One is its EEE tax regime, and the other is its safety from any personal liabilities. As we have already discussed previously, there are only limited financial products in India that come under the EEE tax regime. The second-biggest advantage is its safety from any personal liabilities.

Banks can withdraw money from your savings account and also fixed deposits if you default on your loan repayments. However, it is not valid with your money in the PPF account. It is safe. As you know, every financial product has its pros and cons. However, you have to choose these products based on your risk appetite, time-horizon, and asset allocation.

“One of the basic rules of the universe is that nothing is perfect. Perfection simply doesn’t exist. Without imperfection, neither you nor I would exist”

Stephen Hawking

There may be other aspects of the Public Provident Fund account that I may not have mentioned in the post. However, you can always ask me your doubt in the comment box given below. You can also share it with your loved ones with just a few clicks.

Thanks and regards,

finguru@finlessons.com

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