All You Need to Know About the Public Provident Fund (PPF) Scheme

Public Provident Fund (PPF) scheme is the most commonly preferred investment avenue for individuals. This scheme was introduced in 1968 to encourage investors to invest their savings and earn a safe return from it. To encourage investment in PPF, the scheme provides tax benefits on the amount contributed, the interest earned and the maturity amount.

The PPF scheme carries a sovereign guarantee and is the safest option available to the individuals. Back in 1968, the scheme was open for individuals, HUFs, Association of Persons (AOPs) and Non-resident individuals. But now, only individuals are allowed to open a PPF account.

How to check whether you are eligible to open a PPF account?

To open a PPF account, you should fulfil either of the following conditions: 

• Be a resident individual.
• Be a resident minor, where a legal guardian can open an account for the minor.

Every individual cannot have more than one PPF account. You cannot open an account under joint ownership. Also, a PPF account cannot be opened by HUFs, BOIs, AOPs and NRIs. An individual who has become an NRI during the tenure of investment can continue investing until the end of the investment period. 

What the features of the PPF scheme?

Here are the features of the PPF scheme that you should know before investing your hard-earned money: 

1. Period of investment: The least tenure of a PPF account is 15 years. You can extend the period for a block of 5 years at the end of the tenure. It can be extended as many times as an account holder wants, but it should be for a block of 5 years. The 15 year maturity period is calculated from the end of the year and not from the date of account opening.
2. Limit of investment: A minimum investment of Rs 500 is required to open a PPF account. You can deposit up to Rs 1.5 lakh in the PPF account in a financial year. The investment can be made in a lump sum amount or in a maximum of 12 instalments in a year. You have to invest at least once in a year to keep the account active. Even if you have opened accounts in the name of your children, the cumulative deposit in all account should not be more than Rs 1.5 lakh in a year. Section 3 of Public Provident Fund Scheme 1968 on “Limit of subscription” states: “Any individual may, on his own behalf or on behalf of a minor of whom he is the guardian, subscribe to the Public Provident Fund (hereafter referred to as the Fund) any amount not less than Rs 500 and not more than Rs 1.5 lakh in a year.”  Also, you will not earn interest on the amount invested over Rs 1.5 lakh in a year.
3. Nomination: You can nominate your family member for the PPF account at any time during the investment period or at the time of opening the account.
4. Loan allowable: You can avail a loan against your PPF account after three years of account activation. The maximum amount of loan you can get is 25% of the closing balance of the previous year.
5. Withdrawal: In case you require funds and want to withdraw your money before 15 years, the scheme allows partial withdrawal from the 7th year, i.e. on completing six years. However, the withdrawals can be made only once in a financial year.

What is the interest rate and when is it paid?

Currently, the interest rate for the Oct-Nov-Dec quarter of 2019 is 7.6% p.a. which is compounded annually. Interest is calculated on the minimum balance in the PPF account between the 5th day and end of the month and is paid on 31st March every year. 

What are the tax benefits available on PPF investment?

PPF falls under the Exempt-Exempt-Exempt (EEE) category for the income tax purposes. To decode, all the deposits made to the PPF account are eligible for deduction under section 80C of the Income Tax Act. Also, the interest received and the matured amount are exempt from tax at the time of withdrawal. 

For any clarifications/feedback on the topic, please contact the writer at komal.chawla@cleartax.in