Public Provident Fund (PPF): Everything we Need to Know Before You Invest
PPF is one of the India's oldest and most trusted savings schemes backed by the Government of India, which insures safety of our funds. Whether we are saving for retirement, our child's education, or just want a low-risk place to park our money, PPF is worth investment.
Let’s decode the PPF investment-
What is PPF?
PPF is a long-term savings scheme which is voluntary in nature and meant to help us build a retirement corpus to achieve our long-term financial goals. We can open a PPF account at bank or in post office.
Who Can Open a PPF Account?
Only Indian residents can open a PPF account. NRIs (Non-Resident Indians) cannot open a new one. If he already had a PPF account and later became an NRI, he can still contribute, but he cannot extend the tenure of his account. Also, after September 30, 2024, such accounts held by NRIs will not get any interest. Parents or guardians can open a PPF account on behalf of their minor children. But we can neither open a joint account nor more than one PPF account.
Key Features of PPF
1. Lock-in Period
A PPF account comes with a lock-in period of 15 years. This means our money stays invested for 15 years before it fully matures. However, we are allowed to make partial withdrawals after 5 years, with certain limits. After the 15-years, we can extend your account in blocks of 5 years, as many times as we like.
2. Minimum and Maximum Investment
We need to invest minimum 500rs in a financial year to keep our PPF account active. We can invest maximum 1.5 lakhs in a year. If we have a PPF account and also contribute to our minor child's PPF account, the combined contribution across both accounts still cannot exceed more than 1.5 lakh in a year.
3. Interest Rate
PPF is a floating rate investment, which means the interest rate is not fixed forever. The Central Government announces the applicable interest rate every quarter. If a PPF account belongs to a minor, it gets the interest rate according to the Post Office Savings Account (POSA) rate until the child turns 18, after that the standard PPF rate applies to his account. Also, if we accidentally have more than one PPF account, only our primary account earns interest within the yearly limit. Any extra deposit amount beyond the yearly limit does not earn interest and it is returned to the holder.
4. Loan Against PPF
If we need money in our bad times but we do not want to withdraw it from our PPF account, in that case we can take loan against our PPF account. This facility is available from the starting of the 3rd financial year and till the end of the 6th financial year after opening the account. We can take the loan up to 25% of the balance in our account at the end of the 2nd financial year before the year in which we apply for the loan.
5. Taxation
PPF have EEE (Exempt-Exempt-Exempt) tax benefit. It means -
The amount we invest (up to 1.5 lakh per year) is deductible under Section 80C of the Income Tax Act.
The interest we get every year is tax-free.
The maturity amount we receive is also fully tax-free.
How Withdrawals Work -
We cannot withdraw our entire PPF balance before maturity. While partial withdrawals are allowed after 5 financial years have passed from the end of the year in which we opened the account. we can make only one partial withdrawal per financial year. The maximum amount we can withdraw is the minimum of -
50% of the account balance at the end of the previous year, or
50% of the account balance at the end of the 4th year before the year of withdrawal.
To withdraw the amount, we have to submit Form-2 with our passbook and a declaration form, which says that we have not made any other withdrawal in the same financial year.
What Happens when our PPF Account Matures?
A PPF account matures after every 15 years. After the maturity of our account, we have two choices -
Extend with contribution - We can continue investing in our PPF account in the block of 5 years. For this, we need to submit Form-4 within one year of maturity to choose this option. Once extended this way, we can withdraw up to 60% of the balance at the time of extension with maximum of one withdrawal per year.
Extend without contribution: If we do not choose to extend with contribution, this option applies automatically. No form is needed. We can withdraw any amount, up to the full balance, but only one time per financial year.
Once we choose one option, we cannot switch to the other later. If we deposit money without formally choosing the "with contribution" option, that amount will not get interest and will not get any tax deduction also.
Premature Closure
In certain cases, we can close our PPF account completely before it matures, as long as at least 5 financial years have been passed since opening it. It is allowed only for -
Treatment of life-threatening diseases for self, our spouse, our parents, or our children.
Financing higher education for self or our dependent children.
A change in our residency status
Now the question is, 'Should You Invest in PPF?'
It is backed by the Government of India, so it is a very safe investment.
It offers tax deductions on investment, tax-free interest, and tax-free maturity (EEE benefit).
It is good for long-term goals like retirement or a child's future.
The interest rates are reviewed every quarter by the government.
It comes with options like a loan against PPF, partial withdrawals, and account extension.