Understanding the Public Provident Fund (PPF)

Image of Indian currency rolled in bundles, placed on a desk and jars of Indian notes and coins placed on a sheet of paper that says PPF (Public Provident Fund) and has a sticky note in the corner which says 'SAVE TAX". There are also 2 pencils on the sticky note

Co-authored by Smriti Bansal

There are plenty of factors to consider when choosing an investment option (explained in detail in our article and free eBook that you can download). Finding an option in which we can invest our earnings and get security along with good returns is a real challenge. In fact the dream investment option is one that offers low risk and high returns. The Public Provident Fund in India, commonly known as PPF, is one such gem among the plethora of options available in the financial market today.

We aim to walk you through the features and benefits of the PPF through this article.

What is a PPF account?

PPF is a tax-free saving scheme regulated by the Indian government. It is a long-term investment option with a lock-in period of 15 years, and has been one of the safest investment avenues for the Indian middle class. The interest rate is set and paid by the government every quarter.

As this investment option is backed by central government of India, there are minimal chances of losing the principal amount. Moreover, a good compound interest rate makes it an attractive option.

Why should you open a PPF Account?

Whether it is for creating a cushion for experiencing financial freedom or investing for one’s post-retirement life, a PPF account is ideal for investors with a low-risk appetite and a desire for consistent returns.

The interest rates for PPF are fixed by the central government and are usually higher than other fixed income instruments such as Fixed Deposits (FDs) and Recurring Deposits (RDs).
Return on investment (ROI) concept: Human hands holding stacks of golden coins and green umbrella tree on blurred nature background, Image depicts how the PPF is a secure investment option
The PPF is more advantageous compared to other fixed investment options since it is completely secure, while the other options are only partially secure

More importantly, the principal and interest amounts remain completely secure, as the plan is backed by the central government. This scheme can hence be utilized for long-term investment purposes as it gives good returns along with security of your funds.

Who can open a PPF account?

Here are the basic eligibility criteria for opening a PPF account.

  • Only an Indian resident can open a PPF account
  • NRIs are not eligible to open PPF accounts. However, a resident Indian who has become an NRI after opening an account can continue the account until maturity
  • Parents/guardians can also open PPF accounts for their minor children
  • Opening of joint accounts and multiple accounts is not allowed

The basic features of a PPF account

Image of a laptop key[ad with a 500 rupee note and some 10 rupee coins stacked on them. The image indicates saving or investing money.

Lock-in tenure

A PPF account has a lock-in period of 15 years. We cannot withdraw funds before the completion of the maturity period.

We should opt for this investment only if we can commit to not having access to our funds for such a long time.

There are some provisions which enable us to withdraw a certain amount after 5 years for things such as health emergencies or children’s education. However, it’s important to note that this comes at an interest penalty of 1% applicable from the date of account opening to the date of withdrawal.

We can only open one PPF account in a lifetime. However, we do have the choice to extend the tenure of our PPF account in a block of 5 years. And there is no limit to number of extensions one can make to PPF account.

Minimum and maximum investment

We can invest a minimum of ₹500 and maximum of ₹150000 annually in our PPF accounts.

If we are unable to make the minimum investment of ₹500 in our PPF accounts, the account gets deactivated.

Tax treatment

PPF comes under the EEE (exempt-exempt-exempt) investment regime of taxation. The principal amount invested each year is exempt up to an amount of ₹150000.

The interest earned and the maturity amount is completely exempt from taxes.

This makes this investment avenue extraordinarily lucrative for investors.

Loan against PPF account

Public provident funds provide the benefit of availing loans against the investment amount. We can avail this loan only from the beginning of the third year till the end of the sixth year from the date of activation of account.

Rubber stamping that says 'Loan Approved'.

The maximum tenure of such loans is 36 months. Also, we can only claim 25% or less of the total amount available in the account for loan purposes.

Withdrawal of PPF

The PPF becomes fully available for withdrawal after 15 years. While partial withdrawals are allowed after 5 years, one must note that only one partial withdrawal is allowed per financial year.

As of 2020 the maximum amount that can be withdrawn per financial year is the lower of the following:

  1. 50% of the account balance as at the end of the financial year, preceding the current year, or
  2. 50% of the account balance as at the end of the 6th financial year, preceding the current year.

To conclude...

The Public Provident Fund is hence one of the most rewarding investment-friendly schemes that has the potential to earn formidable wealth for you. Even in phases of economic recession, it is able to fetch better returns than fixed deposits and other fixed income investments.

In order to reap good benefits from the PPF, we should start early with this plan.

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Disclaimer: This article is for educational purposes only. It should not be considered financial or legal advice. Please consult a financial professional before making any significant financial decisions.