Public Provident Fund (PPF) is a long-term, small saving scheme backed up by the government, the motive behind starting this scheme was to provide old age income security to the workers in the unorganized sector and self employed individuals as they invest in Employee Provident Fund (EPF). Public Provident Fund is the best option for long term investment in the debt category, a very important retirement saving option for individuals, more important for those who are not salaried employees.
Features of PPF
PPF works on financial year basis from April 1st till March 31st. 8.80% p.a. is the current interest rate. This is liable to change. The balance amount in PPF account is not liable to attachment under any law or order of the court in respect of any debt or liability, but it can only be attached by the Income Tax and Estate Duty authorities.
Investment Amount
o You are required to deposit a minimum amount of Rs. 500 per year in a PPF account.
o The amount limit which can be deposit in a PPF account is Rs. 100,000. The earlier limit was Rs 70,000 then it has increased to 1 lakh from 1.12.2011.
o The amounts that can be deposit should be in a multiple of Rs.5.
o The deposit can be made in lump sum or multiple instalments but the limitation is only 12 times in a year.
o Amounts can be deposited either by cash, cheque or via demand draft. If you are depositing a cheque or demand draft, then the date of deposit that will appear in your PPF account will be the date of cheque clearance and not the day you present the cheque. For example, if you deposited the cheque on the 1st day of the month but it fails to clear by the 5th day for any reason then you are losing out on the interest for the entire month.
o After investing the money, please make sure that you get the passbook updated.
If you do not deposit the minimum amount in your PPF account then the account will be termed as discontinued account. Interest will however continue to accumulate. You can regularize the account again only by paying the penalty fee of Rs 50 for each year of the minimum amount which has not been deposited along with contribution liabilities of Rs 500 per Financial Year. For example, you paid in the first year Rs. 400, second year Rs. 10,000 and third year Rs. 0. You are required to pay Rs. 50 per year into your PPF account where you did not pay the minimum amount of Rs. 500. In the example, you will have to pay Rs. 100 as fees, i.e., Rs. 50 for 1st year on the payment made was Rs. 400 as instalments and Rs. 50 for 3rd year which was made Rs. 0 as an instalment. Additionally, you will have to deposit Rs. 100, Rs. 0 and Rs. 500 as liabilities for the first, second and third year as the amount deposited in the account fell short of Rs. 500.
Duration
The duration for the investment in PPF account is 15 years. However, the effective term works out to 16 years i.e., the year when opening the account and then adding 15 years to it. The addition made in the 16th financial year will not earn you any interest but you can take advantage of the tax reimbursement. For example, if you are to open a PPF account on the 1st of April 2017, the calculating actually begins from the end of the year, i.e. 31st March 2018. So your account will get matured on 31st March 2032 and not 31st march 2031!
The account holder has given an opportunity to continue the PPF account for any period in a segment of 5 years after the expiry of that span. The account holder can hold the account after maturity without making any further deposits for any period. The balance in the account will continue to earn interest at normal rate as allowed on the PPF account till the account is closed.
PPF works on financial year basis from April 1st till March 31st and at the end of the financial year an interest is credited.
Interest
PPF works on financial year basis from April 1st till March 31st. 8.80% p.a. is the current rate of interest which is liable to a change. The interest is calculated monthly on the lowest balance between the end of the 5th day and the last day of the month, the total interest is added back to the PPF only at the end of the year.
Interest Rates
The interest earned in PPF remains fixed for one year and is no longer guaranteed forever. It is actually bench marked to the 10-year government bond yield and will be 0.25% higher than the average government bond yield. This rate will be declared every year in March-April. Risk
An investment in the PPF is equivalent to the risk of lending to the government, and hence has the lowest level of default risk.
Tax Benefits
Tax benefits are on both the amount invested (principal) and interest earned.
a. The amount you invest is eligible for deduction under the Rs. 1, 00,000 limit of Section 80C. Remember f benefits expenses like life insurance premiums, children’s school fees qualify under Section 80C as deductions in addition to other approved investment mediums like ELSS, 5 year FD’s, NSC etc. If you have exhausted your 80C contributions you can still deposit 1,00,000 without claiming 80C deductions.
b. Interest earned on the investment is completely exempt from tax under Section 10 (11) of the Income Tax Act. On maturity, the entire amount including the interest is non-taxable. One should show the interest income of PPF account.
Exempt Income
8% tax-free interest is effectively 12.85% pre-tax interest if you are in the 30% tax bracket and 11.25% if in the 20% tax bracket. It is difficult to find fixed-income instruments (at the same low risk level) that can yield you comparable returns!
Liquidity
From liquidity point of view, your funds are locked in for 16 years. There is no option to prematurely close a PPF account before the mandatory period of 15 years, except in case of death of the account holder. Liquidity is Poor but loans and partial withdrawals are available. Loan facility is available from the third year and Partial withdrawals are allowed only from the sixth year onwards.
Loans
o You can take a loan on the PPF from the third year of opening your account to the sixth year. So, if the account is opened during the financial year 2009-10, the first loan can be taken during financial year 2011-12.
o The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. You can avail a loan amount of up to a maximum of 25% of the balance in your account at the end of the second year immediately preceding the year in which the loan is applied for.
o The loan must be repaid in a maximum of 36 EMIs.
o Interest payable on PPF Loan is 2% per annum (1% upto 2012). If the loan is not repaid back, the interest is charged at 6% per annum.
o You can take a second loan against your PPF account before the end of your sixth financial year, but your second loan can be taken only once your first loan is fully settled.
Withdrawals
a. You can make withdrawals from the sixth year i.e, after expiry of 5 years full financial years from the end of the year in which your initial subscription was made. This means that from the day you open your account, you will need to complete 6 full financial years before you can make any withdrawal.
b. You are allowed to withdraw 50% of the balance at the end of the fourth year, proceeding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.
c. Not more than 1 withdrawal can be made in a year.
d. The withdrawal amount is not repayable.
e. After the expiry of 15 years duration when the PPF account gets matured and the entire funds can be withdrawn from the account.
For example, if the account was opened in 2001-02, and the first withdrawal was made during 2007-08, the amount you can withdraw is limited to 50% of the balance as on March 31, 2004, or March 31, 2007, whichever is lower.
For example, if you opened your PPF account on April 1st, 1992, you can make your first withdrawal after April 1st 1998, and the amount of withdrawal will be limited to 50% of the balance as 31st March, 1994, or the balance on 31st March 1998, whichever is lower.
Nominee and Death
In case of death of the account holder, the balance amount in the account of the deceased account holder will be paid to his nominee or legal heir, as the case may be, even before expiry of 15 years. The nominee or legal heir cannot continue the account by making fresh subscriptions to it. If the balance in the amount is more than 
1 lakh, then the legal heir or nominee has to prove identity and provide the relevant documentation to claim the amount in the PPF account.
1 lakh, then the legal heir or nominee has to prove identity and provide the relevant documentation to claim the amount in the PPF account.Maturity
A PPF account has a maturity of 15 years. After 15 years, you have the following options:
a. Encash the total maturity proceeds of the PPF account which is exempt from tax.
b. Within 1 year from date of expiry of 15 years, apply for extending PPF block period of 5 years.
c. If one applies for extension of your PPF account by filling Form H, one again has two options:
I. The account holder can retain the account after maturity for any period without making any further deposits. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed.
II. The account holder can make deposits as earlier.
After the expiry of 5 years, you can continue to extend the duration of the PPF account by 5 years. There is no limit to the number of such extensions.
For example, if you opened a PPF account in year 2016, then it would mature in year 2032. In year 2032, you will have an option to encash your PPF balance or to extend the maturity of PPF for 5 years more upto 2037. This decision will have to be taken by you upto 2033 within 1 year after maturity. After 2037, you can continue to extend your PPF account to years 2042, 2047 and so on.
How much can one earn through PPF?
PPF is a long term investment and banks upon the Power of Compounding; the more the numbers of years for which you invest better the returns. If one invests Rs 1 lakh before 5th Apr every year in PPF, after 15 years he will earn 31.44 lakh assuming interest rate is 8.8% throughout the tenure.
Tax Assist is a professional income tax consultancy in India for both corporate houses and individual tax payers; the latter comprising Salaried Individuals, Seafarers, Professionals and Non Resident Indians.
With the help of Tax Assist and its team of income tax professionals, taxpayers can minimize their Income Tax liability, maximize their net income and create opportunities to save for current and future needs while maintaining proper accounting standards and income tax returns which are compliant with the Law.
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