9 minsJanuary 28, 2018
The Public Provident Fund (PPF) scheme is one of the most popular investments in India today. And, this is no surprise because PPF enjoys a favourable
tax status, i.e. Exempt-Exempt-Exempt (E-E-E). This means, contributions are eligible for tax deduction under Section 80C of the Income Tax Act, 1961, the interest earned is tax-free, and maturity proceeds are exempt from tax.
Moreover, the PPF account cannot be attached in case of debt or liability. The PPF scheme is framed under the PPF Act of 1968, and is a Government-backed long-term saving scheme. Hence, PPF is one of the safest investment instruments
––– the money invested in a PPF account remains safely yours for life!
Here are some of the key features of the PPF account:
|Eligibility||Applicant needs to be a Resident Indian
|Entry Age||No age is specified |
(Minor is allowed through guardian)
|Interest rate||7.60% p.a. compounded annually*|
|Tenure||Tenure 15 financial years (plus the first year of investment)|
On completion of 15 years, the account can be extended in a block of 5 years
|Minimum Investment||Rs 500 p.a.|
|Maximum Investment||Rs 1,50,000 p.a.|
(A maximum of 12 deposits allowed in a financial year)
|Tax Benefit||Up to Rs 1,50,000 under Section 80C; |
Interest earned is exempt from tax and so are the maturity proceeds
|Can be opened at||Any Post Office and some authorized branches of Banks|
|Who cannot invest||Hindu Undivided Family (HUF);|
Non-resident Indians (NRIs);
and Person of Foreign Origin
|Mode of Payment||Cash / Crossed Cheque / Demand Draft / Pay Order / Online Transfer in favour of the Accounts Officer |
|Nomination||Nomination facility is available|
*The interest rate is currently 7.6% p.a. as on Jan 1, 2018. This is subject to change.
Where can you open a PPF account?
PPF account can be opened at any branch of India Post or at authorised banks. Axis Bank is one of authorised banks to open a PPF account.
Who is eligible?
Only Resident Indians are allowed to open the PPF account for self. Joint holding is not permitted. A minor through a guardian, too, is permitted to open a PPF account.
Hindu Undivided Family (HUF), Non-resident Indians (NRIs), and Person of Foreign Origin are not permitted to open the PPF account.
How to open a PPF account?
All you got to do is:
- Fill in ‘Form A’
- Attach 2 photographs
- State your Permanent Account Number (PAN)
- Affix a copy of your address proof (Valid Passport, permanent Driving License, Voter Id, Aadhaar, Ration Card, etc.)
- Affix a copy of your identity proof (Permanent Account Number (PAN) card, Aadhaar, Voter Id, valid Passport, permanent Driving License, etc.)
….and you’re done.
For a minor, however, a Birth Certificate may also be needed.
Once your formalities are completed, you will receive a PPF account passbook which will record all your PPF transactions.
At any point in your life, you are permitted to have only one PPF account in your name. If at any time it is seen that you have more than one PPF, the second account will be deactivated, and you receive only the principal amount.
If you have a General Provident Fund account or an Employees Provident Fund (EPF) account, you can still have a PPF account –– there is no restriction.
How to add a nominee for your PPF account?
You can nominate one or more persons to receive the amount standing to your credit in the event of your death. Use ‘Form E’ to make initial nominations. If at a later time, you wish to change them, use ‘Form F’.
If you nominate a minor, appoint somebody to receive and hold the PPF funds until the nominee turns 18 years.
How can you deposit money in a PPF account?
You can contribute/deposit/invest money in the PPF account vide cash, crossed cheque, Demand Draft, Pay Order, or through an Online Transfer.
The deposits need to be in multiples of Rs 5 with a minimum investment of Rs 500 per annum, and a maximum of 12 deposits in a year, totally not exceeding Rs 1.50 lakh. So, you don’t need to invest it all in one shot; contributing convenient
sums is possible.
If you forget to contribute/deposit/invest one year, the PPF account will be deactivated. To re-activate the account, you need to pay a fine of Rs 50 and the minimum subscription of Rs 500 for each year a subscription has not been made. Thereafter,
the PPF account will be re-activated and you can restart earning an interest.
Note that any amount invested over Rs 1.50 lakh will not earn any interest. This excess amount will not be eligible for deduction u/s 80C of the Income Tax Act, 1961.
The interest on your PPF account is calculated on the minimum balance in your account between the 5th and the last day of every month. So, if you are planning to invest/deposit monthly, make sure you invest on or before the 5th of every month
(i.e. your PPF account is credited with the investment amount on or before the 5th of every month).
While investing via cheques, it might take up to 3 working days for the amount to get credited into your PPF account. Therefore, the best thing to do would be to factor this in such a way, that the lowest balance in your account includes the new
investment on or before 5th of the month; otherwise you will lose out on the additional interest in the month.
Are withdrawals from PPF account allowed?
Yes, 1 withdrawal per year is permitted, starting from your 7th year — vide an application in ‘Form C’. The first withdrawal can be done after the completion of 5 full financial years from the end of the year
in which your initial subscription was made.
The amount you can withdraw is limited to 50% of the balance credit accrued at the end of the 4th year, immediately preceding the year in which the amount is to be withdrawn, or the balance at the end of the preceding year, whichever is lower,
as per the PPF rulebook.
Thereafter, you can make 1 withdrawal per year. The withdrawal amounts are not repayable.
For example, if you opened your PPF account on April 1, 2014, you can make your first withdrawal after April 1, 2020, and the amount of withdrawal will be limited to 50% of the balance as on March 31, 2016, or the balance as on March 31, 2019,
whichever is lower.
Is a loan facility available against the PPF account?
Yes, you can take a loan from the fund if necessary. You don’t have to wait till you become eligible for withdrawals from the account.
The PPF rulebook states it as follows:
- “Not with standing the provisions of paragraph 9, any time after the expiry of one year from the end of the year in which the initial subscription was made but before expiry of five years from the end of the year in which the initial
subscription was made, a subscriber may, he so desires, apply in Form D or as near thereto as possible, together with his pass book to the Accounts Office for obtaining loan…”
- To put things in perspective, say you opened a PPF account in August 2015. The end of the financial year when the initial subscription was made is March 31, 2016. The expiry of one year from the end of that financial year makes it March 31,
2017. From this date onwards, i.e. from March 31, 2017, until ‘before expiry of 5 years from the end of the year in which the initial subscription was made’, i.e. 5 years from March 31, 2016 brings us to March 31, 2021, and
you are entitled to apply for a loan against your PPF balance.
Therefore, to simply put it, from the 2nd year of opening the PPF account to the 6th year, as a PPF account holder you can avail a loan.
As regards, the quantum of the loan, the PPF rulebook states:
- “… A subscriber may, he so desires, apply in Form D or as near thereto as possible, together with his pass book to the Accounts Office for obtaining loan consisting of a sum of whole rupees not exceeding twenty five per cent of
amount that stood to his credit at the ends of the second year immediately preceding the year in which the loan is applied for.”
- So, continuing with our earlier example; you are eligible to apply for a loan from March 31, 2017 to March 31, 2021. Suppose you apply for a loan in February 2018, the financial year of loan application is FY 2018-19. The second year preceding
this year is 2016-17. Whatever is the balance standing to your credit at the end of this FY 2016-17, you can take a loan of up to 25% of that balance, rounded to the nearest whole rupee.
- The loan taken against the PPF is to be repaid with interest @2% per annum within 36 months, either in lump-sum or in instalments. If the principal is fully repaid, the balance for the interest should be defrayed in two monthly instalments.
- In case you fail to repay after 36 months, penalty will be charged @ 6% over your PPF rate.
- Further, if you fail to repay your interest entirely in next two months, after the end of your loan term, then this will be deducted from your PPF account balance.
- You can take a second loan against your PPF account before the end of your 6th financial year, provided first loan is fully settled.
What are your options when the PPF account matures?
At the end of 15 years tenure, when the PPF account matures, you have three choices:
You can withdraw the maturity amount and close the account:
If you decided with this, the maturity proceeds are completely exempt from tax. To close the PPF account, you can submit an application with ‘Form C’, and furnish the passbook of the account.
Extend the PPF account for a block of 5 years and make fresh contributions:
- The PPF account can be extended for a block of 5 years, as many times you want to make fresh contributions and earn interest.
- You can also make withdrawals from the account up to 60% of the account balance that was there at the beginning of the extended period. So, your PPF account can act as an important source of inflow during your retirement years.
- Just remember, if you choose to extend your account, submit the necessary documentation, i.e. ‘Form H’, for extension within one year from the maturity date.
Extend the PPF account for a block of 5 years without making fresh contributions:
- If you choose this option, you would continue to earn interest on the balance in your PPF account.
- Withdrawals are also permitted without any restrictions, but only once a year and balance will continue to earn interest until it is withdrawn.
What happens in case of death of the PPF accountholder?
In case of death of the PPF 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 the maturity of 15 years.
Nominees can claim funds by submitting an application to the Accounts Office using ‘Form G’, and provide a copy of the death certificate to the Accounts Officer. Once this is done, the PPF amount, minus any loans (and interest on loans)
that may be pending against the account, will be repaid to the nominee(s).
If there are multiple nominees and one of them has passed away, the remaining nominees have to furnish the death certificate of the nominee in question, post which the Accounts Officer will repay the PPF funds to the surviving nominee(s).
The nominee(s) or legal heir(s) cannot continue the account by making fresh contributions to it. If the balance in the amount is more than Rs 1 lakh, the legal heir or nominee has to prove their identity and provide the relevant documentation
to claim the amount in the PPF account.
If there are no nominees, the legal heirs have to furnish an indemnity letter, an affidavit, the death certificate of the PPF account holder, and a disclaimer letter on affidavit on stamped paper to the Accounts Office.
Also, note that PPF account cannot be transferred from one person to another.
PPF is a tax-efficient investment avenue for long-term wealth creation, particularly to plan for your golden years and if you are risk-averse. From a diversification standpoint, make it a point to park some portion of your investible surplus in
PPF. Open your PPF account, today!
If you wish to know more and open a PPF account, reach out to your Axis Bank relationship manager.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.