What is Public Provident Fund ?

What is a Public Provident Fund?

PPF, or Public Provident Fund, is a popular investment scheme in India that offers individuals a safe and reliable avenue to save for their future. It is a government-backed savings scheme introduced by the National Savings Institute of the Ministry of Finance in 1968, aimed at encouraging long-term savings and providing financial security.

Imagine PPF as a financial fortress, where you can build your wealth brick by brick. It is open to all Indian residents and offers an attractive interest rate that is determined by the government each year. The interest is compounded annually, which means your money not only earns interest, but the interest itself also earns interest! Isn't that incredible?

The beauty of PPF lies in its tax benefits. Contributions made to a PPF account are eligible for tax deductions under Section 80C of the Income Tax Act. It's like a magic wand that helps you reduce your tax liability while saving for your future simultaneously.

The tenure of a PPF account is 15 years, but the best part is that it can be extended in blocks of 5 years indefinitely. This gives you the flexibility to continue your savings journey as long as you desire. Moreover, PPF comes with a lock-in period of 5 years, after which you can make partial withdrawals or even take a loan against your PPF balance.
 

One of the most important asset classes to consider is fixed income, which is considered to be a safe option for any investment portfolio. Within this asset class, the Public Provident Fund (PPF) has been a staple for investors since 1968, when it was first launched in India. If you're wondering - "what is a PPF?" - you're in the right place. This is a unique instrument because it comes with multiple benefits and enables you to build a retirement corpus through the power of compound interest. 
 

Importance of a Public Provident Fund

The Public Provident Fund (PPF) holds immense significance in the realm of personal finance for individuals in India. 

First, the PPF offers a rock-solid foundation for your long-term financial goals. It acts as a bulwark against unforeseen circumstances by cultivating a habit of disciplined savings. By allocating a portion of your income to a PPF account, you embark on a journey of financial security and stability.

One of the key advantages of PPF is its tax benefits. Contributions made to a PPF account are eligible for tax deductions under Section 80C of the Income Tax Act. This implies that you can reduce your taxable income by investing in PPF. It's like a financial shield that helps you optimize your tax liability while building wealth simultaneously.

Furthermore, the PPF interest rate is set by the government and is often higher than those offered by other fixed income instruments. This makes PPF a lucrative option for growing your savings over time. The interest earned on PPF is compounded annually, allowing your money to work harder for you.

Another noteworthy aspect of PPF is its long tenure. With an initial lock-in period of 15 years, extendable in blocks of 5 years, PPF enables you to cultivate a long-term investment mindset. This fosters financial discipline and compels you to think strategically about your future needs and aspirations.
 

Features of a Public Provident Fund

1.    Compounded annual interest: The interest earned on PPF is compounded annually, increasing your wealth exponentially over time.
2.    Flexibility of extension: PPF can be extended indefinitely in blocks of 5 years, giving you the flexibility to continue your savings journey.
3.    Attractive interest rates: PPF offers competitive interest rates, often higher than other fixed income instruments, facilitating growth of your savings.
4.    Minimal investment: PPF allows for a minimum investment of Rs. 500 per year, making it accessible to a wide range of individuals.
5.    Exempt from wealth tax: The accumulated balance in a PPF account is exempt from wealth tax, further enhancing its appeal.
6.    Portable across locations: PPF accounts can be transferred across different authorized banks or post offices, ensuring convenience for account holders.
 

Quick Facts to Know About PPF

●    Eligibility: Only Indian residents can open a PPF account 
●    Tenure: 15 years (can be extended in 5-year blocks any number of times)
●    Minimum investment: ₹500 per annum 
●    Maximum investment: ₹1.5 lakhs per annum 
●    Tax benefit: Up to ₹1.5 lakhs per annum under Section 80C
●    Interest rate: 7.1 % 
●    Taxation category: Exempt-Exempt-Exempt
●    Number of accounts per person: One

Benefit of PPF Account

●    A unique aspect of a PPF is that it is completely exempt from taxes. In other words, when you withdraw funds from your PPF account, you need not pay any taxes on it.

●   The interest rate for a PPF is one of the highest for a fixed interest instrument at 7.1%, and it also comes with a tax benefit from year one. On the other hand, not all fixed deposits come with a tax benefit, and the maturity amount is taxable once it lands in your savings account.

●   The interest for a PPF is compounded annually. 

●   You also have the advantage of depositing as little as INR 500 a year while also being able to pay up to INR 1.5 lakhs per year in installments as per your convenience. 

●   You can claim up to INR 1.5 lakhs in tax deductions under Section 80C of the Income Tax Act per annum. 

●   A PPF is one of the safest investments, as it is government-backed and not linked to market instruments. Market volatility does not impact the value of your PPF account balance, and it provides guaranteed returns. 

●   You can take a loan on your account between the third and sixth year for a maximum tenure of three years. The loan amount cannot exceed 25% of the total available amount. A second loan can be taken out prior to the sixth year if the first loan is repaid fully.

●   Upon maturity, you can choose to extend your tenure in blocks of five years. There is no upper limit, and you can continue extending it indefinitely once the block matures. 

●   Account-holders are allowed to nominate one person. This is very important so that your next of kin, or someone you name, will have access to your account in case of your demise or any other unfortunate circumstances. 

Any resident Indian above 18 can open a PPF account and accrue interest on their balance, even if they do not earn an income. However, those without income will not be able to avail themselves of tax deduction benefits.

PPF Account Eligibility

Indian citizens residing in the country can open a PPF account. Minors can have a PPF account if operated by their parents. Non-residential Indians cannot open new PPF accounts, but existing accounts remain active till completion of tenure without the option to extend for 5 years as available to Indian residents.

Guide to Opening Your PPF Account

●    Step 1: Log in to your bank account through internet banking or mobile banking.
●    Step 2: Choose the 'Open a PPF Account' option.
●    Step 3: Select 'Self Account' if it's for yourself or 'Minor Account' if opening on behalf of a minor.
●    Step 4: Fill in the required details in the application form.
●    Step 5: Enter the desired annual deposit amount.
●    Step 6: Submit the application and enter the OTP sent to your registered mobile number.
●    Step 7: Your PPF account will be instantly created! The account number will be displayed on the screen, and a confirmation email will be sent to your registered email address.
 

Important Documents for Opening PPF Account

To open a PPF (Public Provident Fund) account, you will need the following important documents:

    Account Opening Application Form: This form needs to be duly filled with accurate and complete information.
    KYC Documents: You will need to submit valid KYC (Know Your Customer) documents, which may include any of the following:
●    Aadhaar Card
●    Voters ID
●    Driving License
●    PAN Card
●    Passport

    Proof of Residential Address: You must provide a document that serves as proof of your residential address, such as:
●    Utility bills (electricity bill, telephone bill, etc.)
●    Bank statement
●    Rent agreement

    Nominee Declaration Form: You will need to fill out a form declaring the nominee for your PPF account.
    Passport Size Photograph: You should have a recent passport-size photograph of yourself for the account opening process.
 

When to Deposit Money in Your PPF Account?

To ensure timely deposits into your PPF (Public Provident Fund) account, consider the following:

1.    Annual Deposits: Aim to deposit a minimum of Rs. 500 and a maximum of Rs. 1.5 lakh in your PPF account each financial year. Depositing the full amount or your desired contribution within the financial year maximizes the benefits.
2.    Optimal Timing: It's advisable to deposit money into your PPF account at the beginning of the financial year, ideally on April 1st. This allows your investment to earn interest for the entire year. However, you can deposit funds at any time during the financial year to keep your account active.
3.    Deposit Deadline: The deadline for deposits is typically April 5th each year. Depositing before this date ensures that your contributions are counted for the current financial year.

Will the Interest Rates Change?

The Ministry of Finance sets the interest rates across all government-backed instruments every year. From 2009 to 2019, the interest rate for PPFs rose to 8.7%. As of 2022-2023, the PPF interest rate is set at 7.1% per annum, which compounds annually.

How Much Can You Earn?

Investors who start investing early and max out their accounts every year can reap the highest benefits from this interest. By using a PPF calculator, you can get an estimate of potential earnings. However, if you were to invest up to INR 1.5 lakhs per year for 15 years, with an interest rate of 7.1%, you could receive a non-taxable maturity amount of INR 40 plus lakhs. On the other hand, if you were to invest only INR 500 per year, then the maturity amount would be INR 13,561. 

Will the Interest Rates Change of Public Provident Fund?

Yes, the interest rates of the Public Provident Fund (PPF) can change. The interest rates for PPF are set by the Government of India and are subject to periodic revisions. In the past, the interest rates have been revised on an annual basis. The rates can be influenced by various factors such as prevailing economic conditions, inflation, and government policies.

How Much Can You Earn from PPF?

The amount you can earn from a PPF (Public Provident Fund) account depends on several factors, including the interest rate and the amount you deposit.

Essentially, the interest rate for PPF is determined by the government and is subject to change on an annual basis. Historically, the interest rates have ranged from around 7% to 8% per annum. It's important to check the current interest rate as announced by the government for the specific financial year.

To calculate the earnings from a PPF account, the interest is compounded annually. The interest is calculated on the minimum balance between the 5th and the last day of each month.

PPF Withdrawal Rules

1.    Obtain the withdrawal application form (Form 3/Form C) from the bank or post office where your PPF account is held.
2.    Complete the application form by providing the necessary details.
3.    Submit the filled application form to the respective branch of the bank or post office where your PPF account is maintained.

What is Form C?

To withdraw funds from your PPF (Public Provident Fund) account, you need to complete Form 3/Form C, which consists of three sections:

Section 1: Declaration Section

●    Provide your PPF account number and the amount you wish to withdraw.
●    Mention the number of years elapsed since the account was opened.

Section 2: Office Use Section

●    Includes details such as the date of PPF account opening, current balance, previous withdrawal date, available withdrawal amount, sanctioned withdrawal amount, and the date and signature of the authorized personnel.

Section 3: Bank Details Section

●    Requires information about the bank for direct credit or the recipient of the issued cheque or demand draft.
●    Attach a copy of the PPF passbook along with the application.

By accurately completing these sections and including the necessary documents, such as the passbook copy, you can initiate the withdrawal process for your PPF account.
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What Are the Advantages of Investing in PPFs in Terms of Saving Tax?

A PPF falls under the Exempt-Exempt-Exempt (EEE) category. This means that: 

• You can get a tax deduction of up to INR 1.5 lakhs under Section 80C of the Income Tax Act per financial year. 
• The interest and maturity amount are also exempt from tax. 
• Partial withdrawals from PPF accounts are also exempt from taxes.

Rules for Loans on Your PPF

Ideally, you should take a loan on your PPF only if the amount is small and you are in a position to pay it off quickly:

• The loan amount should not exceed 25% of the amount present in your PPF account at the end of the second year preceding the year you applied for the loan.
• You must pay off the loan within three years.
• With PPFs, any loan taken against the account is charged at 1% interest, irrespective of the amount.
• One disadvantage of taking a loan on your PPF account is that it does not earn any interest unless the loan is fully paid back. 

Difference between EPF vs. PPF

EPF (Employee Provident Fund) is a retirement savings scheme for salaried employees, managed by the Employees' Provident Fund Organization, while PPF (Public Provident Fund) is a long-term investment scheme available to both salaried individuals and self-employed individuals, managed by the government. Both offer tax benefits and compounding interest, but EPF is employer-driven, while PPF is individual-driven.

How to check PPF account balance online? 

●    To check your PPF (Public Provident Fund) account balance online, follow these steps:
●    Visit the website of the bank or post office where your PPF account is held.
●    Look for the "PPF account" or "Account Balance" section on the website.
●    Click on the relevant link or option to access the PPF account services.
●    Enter your login credentials, such as username and password, to log in to your account.
●    Once logged in, navigate to the account summary or account details section.

How to Close a PPF Account?

As per PPF guidelines, you can fully withdraw your PPF balance only after the account matures in 15 years. You can withdraw the full amount and then shut the account upon completing this tenure.

However, there are some unique circumstances under which a PPF account can be closed prematurely. For instance, if the account-holders, their parents, spouse, or dependent children are diagnosed with a terminal illness, then these are grounds for premature closure. The other situation is if the account holder wants to leverage the funds for higher education. The relevant documents will need to be furnished in both cases.

Conclusion

A PPF is a preferred long-term savings scheme among a wide profile of investors. Even if you have an EPF account with an employer, you can also start a PPF account and avail yourself of all the tax and interest benefits. From a homemaker to a gig worker, everyone can open an account and start their savings journey.