Public Provident Fund or PPF has been one of the most popular investment options in India. There are many reasons for the popularity of PPF including guaranteed returns, tax benefits on the amount invested, and tax-free returns.
But, even though millions of Indians make PPF investments to achieve long-term financial goals, some aspects of this tax-saving investment are not well understood.
In this blog, we will discuss 12 key features of the Public Provident Fund including tax benefits, maturity and extension rules, eligibility criteria, interest rates and calculation, contribution requirements, and more. A clear understanding of these key features can help subscribers maximize the benefits that they can get by investing in PPF.
Tax Benefits of PPF
PPF investments qualify for Exempt-Exempt-Exempt or EEE status. The first exemption of PPF is on the amount invested. PPF investments qualify for tax deduction benefits under Section 80C of the Income Tax Act.
The second exemption is applicable to the interest earned from a PPF account, which is also tax-free. The third exemption is applicable to the maturity proceeds of the PPF account. All maturity proceeds from a PPF account are exempt from Capital Gains Tax or Wealth Tax.
The EEE benefit of PPF is applicable even if a subscriber makes partial withdrawals from the account or closes the account prematurely. So even in these cases, proceeds from the PPF account will be tax-free.
However, as per a new rule introduced in 2020, PPF withdrawals can now be subject to TDS or Tax Deducted at Source under some circumstances. Under the new rule, TDS between 2% to 5% is applicable to withdrawals exceeding Rs. 20 lakh made from small savings schemes such as PPF. But this TDS is applicable only if the PPF subscriber has not filed an Income Tax Return in the past 3 years.
Maturity Period of PPF Account
It is well known that the PPF account has a maturity period of 15 years. But what is less well known is that this maturity period is not calculated from the date of account opening. The 15 year maturity period of a PPF account is calculated from the end of the Financial Year in which the first investment was made.
For example, if a subscriber makes the first PPF contribution on 24th June 2017, the maturity period will be calculated from the end of the applicable fiscal year, i.e., 31st March 2018. So, the PPF account will mature on 1st April 2033.
As a result, you will have to make 16 annual contributions instead of 15 into your PPF account prior to its maturity.
Extension After Maturity of PPF Account
After the completion of 15 years, the PPF account matures, and the account holder has to choose between 2 options:
Option 1: Withdraw the account balance and close the account
Option 2: Extend the account with or without additional contribution
Under current rules, the extension of a matured PPF account can be done in blocks of 5 years, and there is currently no limit on the number of times this extension can be made. However, the extension request has to be made within 1 year of the maturity of the PPF account.
During this extension period, the PPF account will continue to earn interest at the applicable rate. If the extension is made without additional contribution, the subscriber does not have to make fresh deposits into the account and the balance in the PPF account will continue to earn interest at the applicable rate for the next 5 years.
On the other hand, if the subscriber decides to extend the matured PPF Account with new contributions. Interest can be earned on both the existing PPF balance as well as the fresh investments at the applicable rate.
Minimum and Maximum PPF Contribution
As per existing PPF rules, a minimum annual deposit of Rs. 500 has must be made in the account to keep it active. The maximum annual contribution allowed in PPF is currently capped at Rs. 1.5 lakh. However, this maximum yearly contribution of Rs. 1.5 lakh is subject to periodic change.
If a subscriber’s annual Public Provident Fund deposits exceed Rs. 1.5 lakh, the excess amount is treated as irregular and refunded to the subscriber without any interest.
On the other hand, in case a subscriber fails to make the minimum annual contribution of Rs. 500 in a financial year, the PPF account will become inactive. An inactive PPF account can be activated at a later date by paying a penalty of Rs. 50 for each year of inactivity. This penalty is payable in addition to the Rs. 500 minimum contribution required for each year the account was inactive.
But, even if you miss making the minimum annual contribution of Rs. 500, you will continue earning interest on the account balance at the applicable interest rate.
Eligibility Criteria for Public Provident Fund
All Indian citizens are allowed to open a PPF account in their own name. Additionally, it is also possible for parents/legal guardians to open a PPF account in the name of a minor child.
However, joint PPF accounts are not allowed and HUF (Hindu Undivided Family) are also not allowed to open PPF accounts under current rules.
Non-Resident Indians (NRIs) also cannot open a new PPF account. But, if the PPF account was opened before the subscriber became a non-resident, the PPF account can be continued up to its maturity. However, after maturity, NRIs are not allowed to extend their PPF account.
PPF Account for Minors
Parents can open a PPF account in the name of a minor child, but, only one such account can be opened by either parent. The maximum cumulative contribution allowed in PPF for a parent and the minor child is Rs. 1.5 lakh annually.
So, if Rs. 1.5 lakh is deposited in the minor’s PPF account in a financial year; the parent cannot invest an additional Rs. 1.5 lakh in his/her personal PPF account.
While parents are allowed to open PPF account in the name of their minor children, grandparents are not allowed to do the same for their minor grandchildren. However, a grandparent can open a PPF account for minor grandchildren if he/she is the legal guardian.
A PPF account for a minor child is a popular investment route for Indians as it can help build a tax-free corpus. This corpus can later be used for various purposes, including the child’s higher education expenses when the PPF account matures after 15 years.
PPF Interest Rate and Calculation
PPF is a fixed return investment with an interest rate decided by the Government of India on a quarterly basis. Since its inception, the PPF interest rate has gone through many ups and downs.
For example, in the late 1960s, the PPF interest rate was less than 5%, but by the 1990s, it had reached the all-time high of 12% p.a. However, since then, the PPF interest rate has been declining steadily, and the current rate is 7.1% p.a.
PPF interest is calculated on a monthly basis, however, the interest is credited to the account annually at the end of each financial year on 31st March. The principal amount used to calculate interest is the lowest PPF account balance between the 5th and the last day of the month.
Partial Withdrawal of PPF Account Balance
Subscribers are allowed to make partial withdrawals from the PPF account after the completion of 5 financial years. But, this 5 year period is calculated from the end of the financial year in which the first contribution was made. So, partial withdrawal of PPF balance can actually be made after the start of the 7th year of the PPF account calculated from the date of account opening.
There are some key conditions that need to be fulfilled when making a partial PPF withdrawal, such as:
- Only 1 withdrawal can be made in a financial year
- Post withdrawal, the subscriber cannot opt for a loan against the PPF balance
- The maximum withdrawal allowed is equal to 50% of the PPF account closing balance in the previous financial year
The above withdrawal rules are applicable to Public Provident Fund accounts that have not yet matured, and a different set of rules are applicable to PPF accounts that have been extended post maturity.
If a PPF account has been extended without additional contribution, the subscriber can withdraw any amount up to the total balance of the account. However, only 1 withdrawal is permitted in a Financial Year in such cases.
On the other hand, if the account has been extended with additional contribution, the maximum withdrawal limit is 60% of the account balance at the start of the extension period.
Closure of Public Provident Fund Account
The process of closing a PPF Account after maturity or end of the extension period is quite simple as the subscriber can just submit an application with the bank or post office managing your PPF account.
But, prematurely closing the account involves a few terms and conditions. Firstly, premature closure of a PPF account is allowed only after completion of at least 5 financial years. So, a subscriber can close a PPF account only after the start of the 7th year from the date of opening the account.
Secondly, premature closure of a Public Provident Fund account is allowed only under some specific conditions such as higher education, change in residency status, or to arrange funds for a serious illness.
Additionally, the interest earned by the subscriber will be 1% lower than the PPF interest rate that the subscriber would have received by continuing the account. While this 1% penalty might seem small, this lower interest rate is actually applicable from the date of account opening.
So, suppose a subscriber has earned 8% interest on the PPF account for the past 10 years. In case the PPF account is closed prematurely, the interest earned will be recalculated at the reduced rate of 7%. This will reduce the returns obtained from the PPF account at the time of premature withdrawal.
Loan Against PPF
Between the 3rd and 6th years of the PPF account, subscribers have the option to apply for a loan against PPF. As per current rules, the maximum eligible PPF loan amount is 25% of the closing balance in the 2nd year preceding the Financial Year in which the loan application is made.
For example, suppose a Public Provident Fund subscriber applies for a loan against PPF in August 2021. In this case, the eligible loan amount will be 25% of the PPF account balance recorded on 31st March 2021.
The interest rate applicable to a loan against PPF is 1% higher than the applicable PPF interest rate. So, based on the current PPF interest rate of 7.1% p.a., the interest rate for a loan against PPF will be 8.1% p.a.
But as the PPF interest rate is subject to change on a quarterly basis, the interest rate applicable to a loan against PPF can also change. But once the loan has been disbursed, the interest rate gets locked and will remain the same till the end of the repayment period.
A loan against PPF is offered with a tenure of 36 months. If the outstanding loan amount is not repaid within this period, the interest rate of the loan is increased to 6% in addition to the PPF interest rate. So, a penal interest rate of 5% p.a. on the original loan interest rate is applicable if the loan is not paid off within 36 months.
Attachment of PPF Account for Debt Repayments
A PPF Account or its balance cannot be attached by a court order or decree in order to pay off any outstanding debts or liabilities of the subscriber. But while debtors cannot get access to a PPF account, the same rule does not apply to Income Tax authorities.
The IT Department is legally allowed to use the PPF account balance towards the settlement of any tax-related orders issued to the PPF subscriber.
Opening of PPF Account
An individual is allowed to open only 1 PPF account in their name. If a subscriber opens more than one PPF account, the second account will be considered an irregular account and will not carry any tax benefit or earn any interest.
Currently, subscribers have the option of opening a PPF account either with a bank or with the post office. Additionally, many banks are currently providing the option of opening a PPF account online.
In order to open a PPF account online with a bank, you need to meet some key criteria such as:
- Having a savings account with the bank
- Access to Internet Banking login credentials
- Aadhaar Number
- A mobile number linked to Aadhaar for receiving Aadhaar OTP
At the time of account opening, the subscriber has to make a minimum deposit of Rs. 500. Once the PPF account is open, it can be easily transferred from one bank to another or from a bank to a post office as per the subscriber’s convenience.
The combination of guaranteed returns and tax-saving benefits has historically driven the popularity of the Public Provident Fund in India. While the continuous decline in interest rates has led many to seek out alternative investments, the PPF account still continues to be one of the most popular tax-saving investment options in India.