Public Provident Fund or PPF: Meaning, Features, and Benefits

The term “provident” stands for timely preparation for the future. True to its name, the Public Provident Fund, or PPF, is suitable for anyone who wants to build a retirement corpus taking minimal risks with the principal invested. It can help you to get into the habit of investing and can teach financial discipline through its restraints on premature withdrawal. 

Introduced in India in 1968 by the National Savings Institute, the scheme is one of the most popular investment schemes in the country. PPF not only keeps the invested capital protected but also earns a decent return. On top of that, it also comes with tax-saving benefits as you get deductions under Section 80(C) of the Income Tax Act.

What is a PPF Account?

A Public Provident Fund scheme is a government-backed scheme in which the investors deposit their savings for a tenure of a minimum of 15 years. During this period, the savings earn a fixed rate of return, compounded annually. 

The Finance Ministry announces the rate of interest every quarter. The current interest rate is 7.1% per annum. The interest on the deposits is calculated based on the lowest balance in the account between the 5th day and the end of the month. It is credited annually on March 31st. 

Features of the Public Provident Fund

Tenure

The minimum investment tenure of a PPF is 15 years, during which the funds cannot be withdrawn completely. At the end of the completion period, the investor has the choice to withdraw the whole amount or extend the PPF for another 5 years. This can be done any number of times, each for a period of 5 years. 

Further, there is no premature withdrawal of the complete amount allowed before the end of the investment tenure. In rare circumstances, there is an option to withdraw 50% of the available amount in the PPF after the completion of 5 years from the end of the year in which the account was opened. This withdrawal also comes with an interest penalty of 1%.

Principal amount

You must invest a minimum of Rs. 500 in your PPF account every year to keep it active. In case your account becomes inactive, you stop earning interest on your capital, although the principal amount remains safe. Although there is no upper limit on the amount that you can invest, the government pays the interest only on the initial Rs. 1.5 lakhs invested.

Deposit frequency

You can invest in PPF either in a lump sum or on a monthly basis. In any case, a minimum of Rs. 500 must be invested in a year to keep the account active.

Mode of deposit

The deposit into a PPF account can be made through:

• Cash
• Cheque 
• Demand draft
• Online transfer

Read More: Process for PPF Payment: Online and Offline

Risk

Since PPF is a government scheme, there is a sovereign guarantee associated with it. The risk involved in PPF investment is the least amongst all investment classes. Although the interest rate keeps changing, you get guaranteed returns at the rate promised by the government for a given fiscal year.

Nomination

The account holder can nominate someone for their account, who will obtain the proceeds in case of their demise. If you want to nominate more than one person, you have to mention the percentage share of each nominee. You are not allowed to nominate someone if you hold a PPF on behalf of a minor. 

Loan against investment

A PPF account can be used to obtain a loan in the period between the 3rd and 5th year of opening the account. The amount of the loan cannot exceed more than 25% of the available balance, and the period of the loan cannot be more than 36 months. If the first loan is entirely paid out, a second loan can be taken before the end of the sixth year. The best part about loans against PPF is that the interest rate is just 1% per annum.

Tax Benefits of the Public Provident Fund

Public Provident Funds fall under the Exempt-Exempt-Exempt (EEE) category of investment vehicles. This means that, as per section 80-C of the IT Act, there are tax exemptions on:

1. An annual investment of up to Rs. 1.5 lakh in an account
2. The interest income earned on the PPF account balance
3. The final withdrawal from the PPF account

Read More: What are the Benefits of Public Provident Fund (PPF)?

How to Open a PPF Account?

You can open a PPF account both online and offline at your convenience:

Online mode: You can apply for a PPF account through your savings account with a bank participating in the provident fund scheme. You need to have internet banking enabled to be able to do so. Just log in to net banking and go to the ‘Open a PPF account’ section. 

Read More: How to Open a PPF Account? All You Need to Know

You will have to fill in details like name, Aadhar number, PAN, DOB, etc. You can transfer a one-time amount or set up a standing instruction for your bank to debit a fixed amount periodically from your account. Post offices do not provide you the facility of opening a PPF account online.

Offline mode: You can also have a PPF account by visiting a participating bank or post office. Here you will have to submit the following documents:

• Application form
• Identity proof
• Address proof

After this, you will be asked to make the deposit payment before receiving the receipt.

PPF vs Tax-Saving Instruments

A PPF account differs from other tax-savings instruments in terms of its low risk exposure and long lock-in period.

Also, most of the instruments can only be invested in by people over 18, but a PPF account can be created on behalf of minors as well.

The table below compares PPF with other investment instruments that enjoy tax rebates:

PPF Withdrawal

At the maturity of a public provident fund, one can:

1. Withdraw the entire amount completely. 
2. Extend the scheme without making new contributions. In this case, the interest on the deposit amount will continue to be compounded until the account is closed. 
3. Extend the scheme for 5 years with contributions. There is no limit to the number of times the PPF account can be extended.

Procedure for PPF Withdrawal

You can withdraw your amount from the PPF by submitting a duly filled “form G” to the concerned bank branch or post office. The form contains details of the PPF account and the bank account where you are transferring the withdrawn amount. Along with this, you will have to submit the PPF passbook as well.

Closing Thoughts

If you fall in the 20% or 30% tax bracket, you should definitely consider investing in PPF to claim the income tax deduction. Another reason to invest in PPF is that it comes with the sovereign guarantee (as secure as fixed deposits, if not more) and earns higher returns than FDs. The only downside of PPF is the lock-in period of 15 years, although, as mentioned earlier, partial withdrawal is allowed in certain cases.

FAQs

Can I withdraw my PPF after 5 years?

There is an option to withdraw your Public Provident Fund 5 years after opening the PPF account. However, premature withdrawal comes with a interest penalty of 1%. The withdrawal is only allowed in one of the following situations:

1. If the account holder, their spouse or dependent children is/are suffering from a life-threatening disease.
2. If the account holder has to pay for higher education.
3. If the account holder is changing their residency status (moving abroad).

In order to withdraw money for the aforementioned reasons, the account holder has to submit the relevant documents. Also, you can withdraw only up to 50% of the balance in your account (50% of the amount in your account either at the end of the fourth year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower.). The fund does not allow a complete withdrawal before the end of the investment tenure.   

What are the benefits of a PPF account?

The benefits of a PPF investment plan are as follows:

• Risk-free fixed returns: Since the PPF is backed by the government and has a fixed rate of return, there is zero risk of losing the capital or the returns. 
• Tax benefits: PPF is an EEE (Exempt-Exempt-Exempt) type of investment vehicle. That is, the capital investment (upto Rs. 1.5 lakh p.a.), the interest income, and the final withdrawal amount are all exempt from paying taxes as per section 80C of the IT Act.
• Loans: Loans can be availed against a PPF account between the 3rd and 5th year of opening the account. The amount cannot exceed 25% of the total amount, and the loan’s period cannot be more than 36 months. 
• Perpetual renewal facility: The account has a maturity period of 15 years. Even after this, it can be extended perpetually in blocks of 5 years. 

Can I hold two PPF accounts?

No. You cannot have more than one active PPF account. 

What happens if the PPF amount is not paid?

If the minimum amount of Rs. 500 isn’t paid into the account in a financial year, the account becomes inactive. It can only be reactivated by paying a penalty of Rs. 50 along with a deposit of Rs. 500 for each year of missed payments. 

Is it mandatory to withdraw the PPF account balance at the end of the 15 years?

No. If you do not want to withdraw the money from PPF at the end of 15 years, you can continue it for however long you want in blocks of 5 years with periodic contributions as before. Or you can choose to continue the account without contributions and receive interest till the account is closed. 

How can a nominee/legal heir claim funds in a PPF account?

In the event of the death of an account holder, the nominee can claim the PPF by submitting a Form-G and the death certificate of the subscriber to the bank or post office where the account is held. In case there is no nominee, legal heirs can claim the PPF account.