A Brief Note on Public Provident Fund

The Public Provident Fund (PPF) offers attractive interest rates and tax benefits as a government-backed investment tool. However, maintaining a PPF account calls for adhering to a few guidelines to avoid penalties. 

The account holder is mandated to make a minimum contribution of Rs 500 to the PPF account annually. If an individual cannot make this minimum contribution, then the account will be deactivated and discontinued, and the bank will charge a penalty of about Rs 50 after a reactivation request for the account is made. 

Ideally, an account holder must try and invest before the fifth of every month. The interest on PPF is calculated based on the minimum balance in the account from the fifth to the last day of the month. In case an individual deposits after the fifth, they will lose out on the interest for that particular month.

Also, it remains crucial to maintain the account’s tenure. The PPF scheme has a tenure of 15 years, and premature closure could invite penalties. However, in certain exceptional circumstances, the account can be closed prematurely after a span of five years. This will be subjected to a 1% reduction in interest, though. 

Moreover, avoid taking loans against the PPF. While one of the benefits of a PPF account is the facility to borrow against it, it’s important to note that these loans carry an interest rate, which may eat up into the returns.

Additionally, a maximum limit also applies to PPF deposits. So, an individual should not exceed the annual limit of Rs 1.5 lakh in a financial year. However, if an individual does so, the excess amount will not earn any interest and not offer any tax benefits.

PPF investments have various features, including a 15-year lock-in period, which makes them ideal for fulfilling long-term financial goals, such as children’s education, marriage, or retirement planning. 

Investing in PPF can aid in fostering the habit of regular saving. In addition, the principal investment and the interest earned under PPF are tax-exempt under Section 80C of the Income-Tax Act (ITA), 1961. 

Moreover, PPF investments are not market-linked; the investment is low-risk and offers assured returns.

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