PPF – A Must Have Investment

PPF – Public Provident Fund - Must Have Investment for Everyone

PPF – Public Provident Fund – Must Have Investment!

PPF (Public Provident Fund) is one of the most popular and probably one of the best investment options in India. And rightly so because of the features, tax benefit and almost risk free returns that it offers. In this post we discuss everything you wanted to know about PPF.

Who can Open PPF Account?

  1. Any citizen of India irrespective of Income Source can open PPF Account.
  2. NRIs cannot open PPF account nor can they extend their existing PPF after maturity. However through a notification in July 2003, they are allowed to continue to make deposit to the existing account they opened before becoming NRIs.
  3. HUFs are no longer allowed to open PPF accounts.
  4. No joint holding is allowed in PPF. The account can only be opened in single name.

Can PPF Account be opened for Minors?

PPF Account can be opened for minors under the guardianship of the parent. Either of the parent (husband or wife) can be the guardian of the child.

Also Read: Download PPF Calculator – With Max Eligible Loans & Withdrawals

How to open PPF Account?

PPF account can be opened in Post Offices and the following banks:

Allahabad BankCorporation BankSyndicate Bank
Andhra bankDena BankUCO Bank
Bank of BarodaIDBI BankUnion Bank of India
Bank of IndiaIndian BankUnited Bank of India
Bank of MaharashtraIndian Overseas BankVijaya Bank
Canara BankPunjab National BankICICI Bank Ltd
Central Bank of IndiaState Bank of India

PPF account in most of the banks can now also be operated online.

At times banks may not be very keen to open PPF account as they do not get to use the money. The immediately transfer the money to RBI. They only get commission on the amount collected. So banks try to sell you products which are more profitable for them.

Also Read: Best Tax Saving Investments u/s 80C

Interest Rate on PPF:

  1. The interest rate is marked to the average Government bond yields and is notified at the beginning of every financial year on April 1 would be notified at the beginning of every quarter. This change is effective from April 1, 2016.  The interest rate as of FY 2016-17 (January to March) is 8.0% (The interest rate is fixed 0.25 per cent above the 10-year government bond yield)
  2. The interest is compounded annually and is credited to the account at the end of financial year.
  3. The interest in PPF is calculated on minimum balance between 5th to the last day of the month. So you should make your investment before 5th of the month or it would not get interest for the month.

History of PPF Interest Rates:

The table below gives the historical interest rates on PPF deposits from FY 1986-87:

PPF Interest Rate History

PPF Interest Rate History

Also Read: Highest Interest Rate on Bank FD – compared across 48 banks

Best Features of PPF:

  1. PPF has sovereign guarantee which mean the principal and interest is guaranteed by Government of India. This makes its Credit risk almost zero!
  2. PPF cannot be attached by courts or government under any circumstances.
  3. The tax on PPF is EEE (Exempt- Exempt- Exempt) which means that there is tax benefit when investment is made, there is no tax when the investment earns interest every year and there is also no tax when the investment is withdrawn on maturity.
  4. The investment in PPF up to Rs 1,50,000 is exempted from income tax u/s 80C. [Budget 2014]

Also Read: Best ELSS (Tax Saving Mutual Fund) to Invest in 2018

Withdrawals from PPF:

The withdrawal from PPF depends on the number of years the account has been active:

  • The entire amount can be withdrawn on completion of 15 years
  • The first withdrawal can be made from 7th year of account being opened
  • The maximum that can be withdrawn in any year is minimum of (50% of balance at end of 4 years or 50% balance at end of previous year)
  • Only one withdrawal can be made in one financial year

Premature Closure of PPF:

Effective April 1, 2016 premature closure of PPF would be allowed in special cases such as cases of serious ailment, higher education of children etc. This shall be permitted with a penalty of 1% reduction in interest payable on the whole deposit and only for the accounts having completed five years from the date of opening.

Also Read: 13 Investments to Generate Regular Income

Loan against PPF:

You can take loan against PPF balance based on the following conditions:

  • Loan can only be taken between 3rd year to 6th year of opening account
  • The interest would be 2% more than the prevailing interest rate on PPF
  • The repayment period is 24 months. The loan can be either paid monthly or in lump-sum
  • The maximum loan amount is 25% of the amount that was present 2 years back preceding to the current loan date

Extension of PPF Accounts:

The PPF account can be extended by a block of 5 years after completion of compulsory locking period of 15 years. There is no limitation on number of times extension is sought. After completion of fist 5 years extension, a fresh request may be given for further extension. So you can keep a PPF account active indefinitely.
There can be two kind of extension request:

  1. Extension without contribution – The balance in the account will continue to earn interest at the prevailing rates till the closure of account. In case the account is extended without contribution, any amount can be withdrawn without restrictions only once every year.
  2. Extension with contribution – in this case withdrawal up to 60% of the balance at the beginning of each extended period (block of five years) is allowed.

Also Read: Should you Invest Rs 50,000 in NPS to Save Tax u/s 80CCD (1B)?

What happens after Demise of PPF holder?

  1. Nomination facility is available for PPF Account. Infact it’s compulsory to fill your nomination while opening PPF account
  2. The PPF account can be closed on demise of the account holder even before completion of 15 Years and the amount is given to the nominee
  3. The other option is to let the account remain open till maturity. It will continue to earn interest but no further contribution can be made to the account
  4. If no Nomination was made, the amount would be passed to the legal heir

Download: Free ebook for Income Tax Planning for FY 2018-19

Limitations of PPF Account:

  1. One Person can only open one PPF Account. If additional account is found, no interest would be paid on that.
  2. The limit for deposit on PPF has been increased to Rs 1.5 Lakhs per year from Budget 2014. If you manage to deposit more than that in financial year, no interest would be paid on that.
  3. You need to invest minimum of Rs 500 in a financial year.
  4. On non-deposit of at least Rs 500 in a financial year the account is discontinued. The discontinued PPF account continues to earn interest.
  5. To revive the discontinued PPF account, you need to pay penalty of Rs 50 per year of non-payment along with the deposit of Rs 500 per missing payment year.
  6. The deposit should be in multiple of Rs 10. You cannot deposit Rs 501 but deposit Rs 500 or Rs 510.
  7. You can make maximum of 12 deposits in a financial year. It need not necessarily be monthly.
  8. The above limit of Rs 1.5 lakh per year is on a person and not on account which means the total investment limit considers the sum of money deposited in own PPF account and other account in which you are the guardian. For e.g. if you have one PPF account on your name and another PPF account on your minor child name with you as the guardian. So for calculating your total deposit limit you need to add investment in both the accounts. So for all practical purpose both accounts are seen as one.

Also Read: Child Plans from Mutual Funds – Should you Invest?

Conclusion:

PPF is rightly one of the best fixed income investment options in India and can serve as a powerful instrument for accumulating savings for Retirement.

17 thoughts on “PPF – A Must Have Investment

  1. Amit Goyal says:

    Good post shared.
    Post is very useful for those who want to save their money through investments and i think PPF is secure area for funding. Thanks again for this post.

  2. Hi Amit
    a question and may be for many salaried people. if we have EPF and it covers the limit of 1.5 lakh, then: can we still invest in PPF on top of that? and if yes, then what is the limit and would we still get privileged/set interest rate on both EPF and PPF? does that make the tax limit and preferred interest limit to 3 lakh (1.5 EPF+1.5 PPF)?

    • Yes PPF and EPF are independent of each other and all eligible person can hold both accounts. The tax exemption for both is u/s 80C which has limit of 1.5 lakh only irrespective of amount you invest.

  3. Sandip Pandit says:

    Dear Amit,
    Thanks for the information. I am on the verge of retirement and balance in PPF is a good amount to fall back on. I remember my early savings in mutual funds, where most investments ( small amounts after long intervals) invariably tended to make losses. Today for perhaps last 10 years, I have heard advice of how ELSS can give better returns. However my personal experience over last several decades is that PPF has been the best saving option where I could contribute without any complicated study of markets or the fear whether the investment will lose money. Of course except for perhaps the last one and half decade, I did not have the income to fulfill the full quota of contribution to PPF (60000 at that time).

    • PPF and ELSS are competing investments for tax saving. Yes there are time periods when ELSS gives better returns and there are periods when PPF out performs ELSS. But its true historically ELSS has given higher returns majority of time but with higher risk. PPF is very safe and its a must have investment especially for risk averse investors. So the answer is people should invest in both PPF & ELSS and the proportion should vary depending on their needs and risk appetite.

  4. Vincent Rimando says:

    That was quite informative Amit. I can definitely suggest this post to my NRI colleagues.

  5. ravinder dasila says:

    Hi Amit,
    i’m 27yr old salaried person. I’m investing in ppf since last 6 years to complete the 80c exemption limit. Since last year i’ve started investing in MFs as well in form of SIPs . Should I be investing in ELSS (for a lesser lock-in period) and reduce my portion in PPF?

    • At 27 years you must invest in ELSS. However if you are motivated by the historical returns in ELSS at this juncture please remember that ELSS can give you negative returns too at the end of 3 years. Go for ELSS if you can hold investment for long term. Also SIP is the preferred route for the same.

  6. Really great article amit!
    Can you tell me which is better- ppf or p2p for investment?
    also can you name a few p2p platforms!

    • PPF and P2P lending are totally different products. PPF has the highest safety as its guaranteed by Government of India. P2P platforms offer high interest rates but can be risky. These portals are still not regulated and in case of default you might not have many recovery options. If higher interest rates of P2P lure you, give it a try with pocket money.

      Also remember the interest earned from P2P would be fully taxable according to your tax slab.

  7. Dear Amit

    Can we use amount in PPF of the name of wife under deductions for computations of income tax (for self).

    • No, PPF investment should be in the name of tax payer or jointly held with their minor child for claiming tax benefit.

      • There are some confusions,

        I think investing in PPF on your spouse name allow you to claim tax deduction under 80c.

        You cannot claim section 80C deductions for any amount deposited by you into your parents’ or siblings’ accounts

        While tax laws allow you to claim 80C tax benefits for deposits into your spouses account, the same rule does not apply to your parents, siblings or relatives.

        – See more at: http://taxguru.in/income-tax/public-provident-fund-ppf-scheme-investment-limit-income-tax-benefit-features.html#sthash.ddrDEf2o.dpuf

        Contributions to PPF accounts of the spouse and children are also eligible for tax deduction. Balance in PPF account is not subject to attachment under any order or decree of court. –

        See more at: http://taxguru.in/income-tax/investment-covered-under-section-80c-of-income-tax-act-1961.html#sthash.e9Pzi5qj.dpuf

        Please clarify.

        • The link you shared says that the benefit is available on PPF deposit on spouse name if done from tax payers fund. These are complicated rules and I would not recommend anyone to take that. It would require you to keep records for the source of money deposited for at least 7 years as I-T files can be opened at anytime in these years. I would always recommend to keep things simple and indisputable as far as taxes are concerned.

          If you are worried about making your spouse beneficiary, you should nominate him/her and write a will for the same.

  8. Very good article. Also increased my confidence level on PPF.

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