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Public Provident Fund (PPF) – Tax benefit and Returns

Individuals who are residents of India are eligible to open an account under the Public Provident Fund scheme. A PPF account may be opened under the name of a minor by his/her legal guardian. However, each person is eligible for only one account under his/her name.

Non-resident Indians (NRIs) are not eligible to open an account under the Public Provident Fund Scheme. However a resident who becomes an NRI during the 15 years’ tenure prescribed under Public Provident Fund Scheme, may continue to subscribe to the fund until its maturity on a non-repatriation basis.

Public Provident Fund (PPF) Investment and Returns 

A minimum yearly deposit of Rs. 500 is required to open and maintain a PPF account, and a maximum deposit of Rs.1,50,000/ can be made in a PPF account in any given financial year. Deposits could be in either one go, or in flexible installments (in multiples of Rs. 100). You could vary the amount and the number of installments, as per your convenience, provided you do not exceed 12 installments in one financial year.The credit to the PPF account is made on the date of clearance of the cheque, not on the date of its presentation

Every subscription should be made in cash or through a crossed cheque or draft or postal order, in favour of the accounts office, at the place at which that office is situated. In case of any cheque, draft or postal order should be drawn at a bank or post office at that place. It is also possible to transfer funds online using net banking in a PPF account opened with SBI also NEFT Transfer from any bank is possible with sbi ppf accounts.

The government of India decides the rate of interest for PPF account. The interest you will earn is currently wef 01.01.2018 is 7.60% per annum (compounded yearly). Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month. Till March 2010, cheques deposited for clearing, up to 5th of the month were eligible for that month’s interest. Since 29 March 2010, only the amounts which are actually cleared on or before the 5th of the month are eligible for that month’s interest.

 Continuing PPF after the 15 year period

The PPF account is valid for 15 years. The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account.  Once your account expires, you can open a new one. The only limitation is that you cannot withdraw it until seven years are completed, after which 50% of your deposits can be withdrawn, if needed. How to extend PPF account beyond 15 years

PPF account holders have an option of extending their accounts after the 15 year tenure with or without further subscription, for any period in a block of 5 years. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed. In case the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year.

Nomination in respect of Public Provident Fund (PPF)

Nomination facility is available. In the case of joint nominees, it is possible to allocate the percentage of benefits to each nominee.

Loans against Public Provident Fund (PPF)

Loans can be availed from the 3rd financial year excluding the year of deposit. Amount of such loans must not exceed 25 percent of the amount that stood to the account holder’s credit at the end of the second year immediately preceding the year in which the loan is applied for.

A fresh loan is not allowed when a previous loan or interest is outstanding. Interest is charged at a rate of 2% if repaid within 36 months and at 6% on the outstanding loan after 36 months. The repayment may be made either in lump-sum or in Installments.

The public provident fund is established by the central government. One can voluntarily open an account with any nationalized bank or post office. The account can be opened in the name of individuals including minor.

The minimum amount is Rs.500 which can The rate of interest at present is 8.7% per annum, which is also tax-free. The entire balance can be withdrawn on maturity. Interest received is tax free. The maximum amount which can be deposited every year is Rs. 1,00,000 in an account. The interest earned on the PPF subscription is compounded. All the balance that accumulates over time is exempt from wealth tax. Moreover, it has low risk – risk attached is Government risk. PPF is available at post offices and banks.

Withdrawals from PPF account

The entire amount in your account could be withdrawn only on maturity. However, in times of financial crises partial withdrawals are permitted subject to certain ceiling limits. You could withdraw once a year, from the 7th year onwards. Such withdrawals, must not exceed, 50% of the balance at the end of the fourth year, or 50% of the balance at the end of the immediate preceding year, whichever is lower.Tax effect in case of premature closure of PPF Account

PPF defaults and revival

If the PPF account holder fails to deposit the minimum of Rs.500 in a given financial year, the account is considered to be discontinued and also loans and withdrawals are not allowed. However, the interest will continue to accrue, to be paid at the end of the term. This account can be revived on payment of a fee of Rs 50 for each year of default, along with the arrears of subscription of Rs.500 each such year.

PPF tax concessions

a. Benefit u/s 80C – The Investments made in PPF Account are eligible for deduction u/s 80C

b. Tax Free Interest – No Tax is payable on the Interest Earned on PPF Account.

Disadvantages of PPF

The problem with PPF is its lack of liquidity. One can withdraw the investment made in 1st year only in 7th year. However, loan against investment is available from 3rd financial year. If liquidity is not an issue, you should invest as much as you can in this scheme before looking for other fixed income investment options.

Second problem is debasement of currency and governments inflation policy as PPF unlike physical assets will not cover a person for inflation.

Interest rates over time

  • 01.04.1986 to 14.01.2000…………………………  12.0%
  • 15.01.2000 to 28.02.2001………………………..  11.0%
  • 01.03.2001 to 28.02.2002 ……………………….  9.5%
  • 01.03.2002 to 28.02.2003 ………………………..  9.0%
  • 01.03.2003 to 30.11.2011…………………………    8.0%
  • 01.12.2011 to 31.03.2012…………………………    8.6%
  • 01.04.2012 to 31.03.2013…………………………  8.8%
  • 01.04.2013 onward…………………………………  8.7%
  • 2014 – March 2016…………………………………..8.7%
  • April 2016 – June 2016…………………………….8.1%
  • July 2016 – September 2016……………………..8.1%
  • October 2016 – December 2016…………………8.0%
  • January 2017 – March 2017………………………8.0%
  • April 2017 – June 2017……………………………..7.9%
  • July 2017 – September 2017………………………7.8%
  • October 2017 – December 2017………………….7.8%
  • January 2018 – March 2018………………………7.6%
  • April 2018 – June 2018……………………………..7.6%
  • July 2018 – September 2018………………………7.6%