Public Provident Fund (PPF) is a Long Term Debt Scheme of the Government of India under the provision of Public Provident Fund Act, 1968 on which regular Interest is paid. The main objective of PPF is to providing old age income security to the employees of unorganized sector and self employed individuals. It is the most tax efficient investment. For the debt or fixed income part of portfolio, PPF is a highly recommended option. PPF is very handy for those who wants to enjoy safety, profitability and tax saving elements in their investments.
Let us look at the some of the basic facts relating to the scheme and also what makes it an extremely attractive investment option :

1. Eligibility :

Any adult resident Indian can open PPF account in his/her name or minors name in the capacity of guardian with SBI or its associated banks or other nationalized banks having a PPF account.

A person cannot open more than one account in his or her name or even have a joint account. NRI’s are not allowed to open an PPF account. If an individual becomes an NRI while the account is in operation, then he or she can continue to invest in the PPF account, on a non-repatriation basis.

2. Investment Limit :

An account holder needs to deposit a minimum Rs. 500 and upto maximum of Rs. 1,00,000 in a financial year.

The depositor has flexibility and freedom for depositing any amount in a maximum of 12 installments in a financial year. In case of a minor’s account, the investment in the minor’s and guardian’s account together cannot exceed the maximum limit.

If for some reason, no minimum amount is deposited in the account in any year, the account gets discontinued (but, cannot be closed before maturity). However, such discontinued account can be revived by payment of the minimum deposit of Rs.500/- with penalty of Rs.50/- for each defaulted year.

3. Maturity :

The account has a maturity of 15 years but in reality, it runs for a 16-year period. The year of deposit is considered as ZERO year and deposits can be made for 15 more years, which makes it 16 years in all.

The lock-in period falls with every passing year. So in the 14th year, it will only be one year.

A PPF Account, on the expiry of fifteen years, can be extended for a further period of five years at a time. The account holder should exercise option in writing for continuation of the account within one year to avail the benefits of exemption of interest from Income Tax on deposits made in a PPF account after expiry of fifteen years.

4. Rate of Interest :

The PPF interest rate is no longer fixed and can change every fiscal year. The PPF Interest Rate is decided by Government of India. It is 0.25% above the 10-year government bond yield. Currently the interest rate is 8.80 % (compounded annually) w.e.f. 01-04-2012.

The interest for the month is calculated on the minimum balance available in the account from 5th of a month to the last date of the month. So deposits into PPF account should be made between 1st and 5th of the month to get interest for that month.

5. Tax Benefits :

 

PPF is an extremely tax efficient investment option because :

i.   Amount invested in PPF is elligible for deduction under Section 80C

ii.  The interest earned on the PPF account every year is not taxable

iii. Entire amount including interest at the time of maturity is not taxable

PPF is one of the few investment options which fall into the category of E-E-E (Exempt-Exempt-Exempt) mode of taxation.

6. Loan facility :

A depositor can avail of loan facility in the third financial year from the financial year in which the account was opened (Zero Year). The loan can be taken up to 25% of the amount in the account at the end of the second year immediately preceding the year in which the loan is applied for.

The loan is repayable in lump sum or convenient installments. If loan is repaid within 36 months, interest is charged at 2% and if it is not repaid within 36 months, the interest at the rate of 6% is charged on the outstanding balance. The interest is to be paid in maximum two installments after the loan amount is fully repaid.

Subsequent loan can be obtained on same terms on repayment of previous loan till the end of 5th financial year from the Zero Year.

In case, the loan is sought from minor’s Account, the guardian has to make a declaration that the money is required for the use/benefit of the minor.

7. Withdrawal :

No premature closure of a PPF Account is permissible except in the case of death of the depositor. However, a depositor can make partial withdrawals, once every year from his PPF account after expiry of five years, from the end of Financial Year, in which the initial deposit was made.

The amount of withdrawal is restricted 50% of the credit balance

• at the end of the fourth year immediately preceding the year of withdrawal   or
• the year immediately preceding the year of withdrawal.

whichever is lower.

In case of accounts extended PPF accounts beyond Maturity period partial withdrawals are allowed once in a year with the condition that the amount of withdrawal during a five year block period should not exceed 60% of the balance in the account at the commencement of the block period.

In case, the withdrawal is sought from minor’s Account, the guardian has to make a declaration that the money is required for the use/benefit of the minor..

8. Other Features of PPF :

 

• PPF is exempt from Wealth Tax.
• A PPF account is free from attachment by a court in respect of any debt or liability incurred by the PPF member.
• On death of the account holder his nominee(s)/legal heir(s) cannot continue the account. The account has to be closed in such case.