All about PPF Scheme

The Public Provident Funds, introduced in 1968, is a savings-cum-tax-saving instrument that earns a healthy interest at a lower risk. As the central government fully guarantees the scheme, it is one of the safest avenues available to Indians to build a corpus making it a popular savings option. We have watched our parents and even grandparents squirrel away their hard-earned savings in PPF accounts. There are several aspects of Public Provident Funds which we aren’t sure about.

Here are some important parts of the PPF scheme which you need to know:

Maturity

Most of us know that the maturity period of a PPF scheme is 15 years. But how many of us know that the maturity period is calculated from the end of the financial year in which you made the deposit and not from the actual date of deposit?

For example, irrespective of whichever date you deposited your money, say from 1 April 2018 to 31 March 2019, the lock-in period of 15 years is calculated from 31 March 2019 onwards. Therefore, the maturity date will be 1 April 2034.

Related: Comparison of PPF and life insurance: Which comes first?

Contribution

The minimum contribution is Rs 500 per year and the maximum is Rs 1.5 lakh per year. You cannot make more than 12 contributions in a year. Either lump sum or monthly contributions are allowed.

It is also important to note that since the lock-in period begins from the last day of the financial year in which you either made a lump sum or monthly deposits, you end up either making 16 or 192 (16x12) as lump sum contributions or monthly contributions respectively.

Eligibility

Only an Indian citizen can open a PPF account. Joint ownership is not allowed. A person cannot have over one account in his or her name, except if the second account is for a minor and that person is a guardian. A minor can open a PPF account with a parent or guardian. A guardian has to be either a mother or father or a court-appointed guardian.

Grandparents cannot open a PPF account on behalf of their grandchild, except if both parents have passed away.

Hindu Undivided Families or Non-Resident Individuals cannot invest in PPF.

Offers partial liquidity

The PPF account has a lock-in period of 15 years. However, depending on the number of years which have passed and the PPF balance, you can either take a loan against it or arrange for partial withdrawal.

When you take a loan, the interest rate will be 2% more than the interest being earned on the scheme. The principle which you repay is credited back to the account and interest paid is accrued to the government. You cannot take a fresh loan till the existing loan is paid off. From the 7th year onwards, you cannot take a loan.

In a particular financial year, you can withdraw only once.

Nomination

PPF provides nomination facility only for accounts held by adults. For accounts held by minors, a nominee cannot be appointed.

Premature close

Earlier, you could not close a PPF account before maturity of 15 years. But the government amended the PPF Act in 2016 and allowed premature closure in the following situations:

• • Five financial years must have passed since the account was opened
  • The amount would be used for the treatment of a life-threatening disease or any other serious ailment of the account holder, spouse, dependent parents and children
  • For higher education

Related: Novice or expert, there’s an investment strategy for you

It is also important to note that the entire amount is granted. The applicable interest rate (for example 8.6%) would be subjected to a deduction of 1%.

Let us check out this example. Assume that you have deposited Rs 60,000 during the first couple of years followed by Rs 80,000 in the third, Rs 90,000 in the fourth and Rs 1,00,000 in the fifth year.

Calculating interest

PPF interest calculation isn’t clear to all. To get the best interest rate, you must have seen people posing questions like “whether they must invest once a year or every month” or “when is the best time to invest”.

This is how the calculation is done: PPF Interest is calculated every month on the lowest balance between the end of the fifth day and the last day of the month. But the total interest earned in the year is added to the PPF only at the end of the year.

This clarifies that the interest isn’t compounded monthly. It is calculated in a very simple way.

Let us consider three cases:

1. Investing a lump sum amount of Rs 36,000 deposited on 1 April
2. Rs 3,000 deposited before 5^th of every month
3. Rs 3,000 deposited after 5th of every month

The interest rate has been taken as 8.6%

Scenario 1: Rs 36,000 deposited on the 1 April

Total Interest: INR 3096 and PPF balance at the end of the year: INR 39096

Scenario 2: Deposit Rs 3,000 before the 5th of every month

Total Interest: INR 1677 and PPF balance at the end of the year: INR 37677

Scenario 3: Deposit Rs 3,000 after the 5th of every month

Total Interest: INR 1419 and PPF balance at the end of the year: INR 37419

Therefore, you can see that there is hardly any difference between investing before and after 5th of every month, but the real difference creeps in when you invest a lump sum amount as compared to a monthly instalment.

Tax implications

Any withdrawal made before the lock-in expires isn’t taxed. But you will need to declare that you have made withdrawals from your PPF account while filing tax returns.

Related: How is taxable income calculated?

Limits your liability

A PPF account cannot be attached to an individual or any entity for paying off any debt or other liabilities. Even a court decree or order cannot direct an individual to pay off debts using money from the PPF account.

Discontinued accounts

If you choose to discontinue your PPF account, you cannot make withdrawals or take a loan against it unless you revive the account by paying penalty and the minimum contributions required. But the account will still receive interest as per the applicable interest rate.

Transferring the account

You can transfer your post office PPF account to any authorised bank and vice-versa. You can also transfer your PPF account between branches of a single bank as well as between banks.

Related: NRIs will no longer qualify to invest in Public Provident Fund

Extending the PPF account

After the maturity of the PPF account, you can extend it in blocks of 5 years for any number of times. You must make this extension within one year from the date of maturity. Even if you don’t make any contribution, the corpus will earn interest at the applicable rate.

During a block of 5 years, you can withdraw only once every year, and the amount which you withdraw cannot be more than 60% of the balance at the beginning of the block.

It is noteworthy that PPF rates have been fluctuating since the last few years, with the current rate at 8% annualised. Before choosing to invest in a PPF scheme ensure that it fits into your strategy to achieve financial goals. And here are some investment strategies for everyone, be it novice or expert.

How to open a PPF account

A PPF account can be opened either through an offline application process or through an online application process. Details of both are listed below:

Offline

All you must do to open a PPF account is to go to your nearest post office or bank and ask for Form A of PPF. Along with the filled-up Form A, you will also have to submit self-attested copies of identity proof and address proof. You will have to make a minimum deposit of Rs. 100 while opening the account. This deposit can be made either in cash or through a cheque. On submission of filled up Form A, the required document and the first deposit, the officer-in-charge would open the account and issue a passbook to you. The passbook would capture the details of your PPF account including details of the deposits made, loans taken, interest earned, total balance, and withdrawals made.

Online

You can also open a PPF account online with your bank. Though not all banks provide this facility, you should check with your bank on the same. Along with the documents needed for the offline process, you would also need:

• Active savings account with the bank with net banking facility activated
• Provide Aadhaar card details

To open the account, login to the net banking portal and choose the option for opening a PPF account. Select the savings account which you would like to use to make deposits into the PPF account. Complete the Aadhaar based e-verification process and your account will be opened.

Documents required

Documents required to open PPF account include:

1. Duly filled Form A
2. A pay-in-slip or a signed cheque of the amount for first deposit
3. Proof of identity - Aadhaar, PAN, Driving license, passport, voter ID card
4. Proof of address - the electricity bill, telephone bill, ration card
5. Birth Certificate if the applicant is a minor
6. Two passport size photos

 

Frequently Asked Questions

1. Who is the guardian – who can open an account for a minor?

‘Guardian’ can be:

1. A parent of the minor
2. If both the parents are dead, or legally incapable of acting on behalf of the minor, the person appointed by law to take care of the property of a minor.

2. What is a year in PPF Account terms?

‘Year’ refers to the financial year (1st April to 31st March) and not a calendar year.

3. What are the rules regarding the repayment of the loan and the interest thereof?

The principal amount of a loan taken under the PPF Scheme is to be repaid within a period of 36 months. The repayment is credited back to the subscriber’s account. The loan attracts an interest of 2% per annum payable at least every two months.

4. What happens if the loan and interest are not paid in the period of 36 months?

If the loan is repaid, only in part within the prescribed period, the interest on the amount outstanding is increased to 6% per annum. The same may be debited from the subscribers PPF account, if not paid on time.

5. Who can open an account under the PPF scheme?

Any individual resident citizen of India can open a PPF account for herself and/or on behalf of a minor for whom she is the legal guardian. Only one PPF account is allowed per person.

6. What is the limit of subscription to a PPF account?

At least Rs. 500 should be deposited in the PPF account in a financial year. The maximum deposit allowed is Rs. 1,50,000. Any amount deposited over the maximum – does not earn interest and is not tax-deductible.

7. How many deposits are permitted in a financial year?

A maximum of 12 deposits can be made to your PPF account in a given financial year, and a minimum of one deposit must be made.

8. When is an account treated as discontinued?

If the subscriber fails to make the minimum contribution in a financial year – the account is treated as discontinued. The account will have to be revived for any future transactions.

9. How can a discontinued account be revived?

To revive an account, the subscriber has to pay the minimum contribution of Rs. 500 for each missed year of contribution. In addition to this – the subscriber would have to pay a fine of Rs. 50 for each missed year as well.

10. What is the rate of interest under PPF?

Interest rate is notified by the Central Government in official gazette from time to time and is currently notified at 8% annualised.