What is Public Provident Fund

The Public Provident Fund (PPF) is a long-term savings scheme in India that was introduced by the National Savings Institute of the Ministry of Finance in 1968. It is a tax-free savings vehicle that is specifically designed for individual investors who want to save for their retirement or other long-term financial goals. The PPF is especially popular in India because it offers a relatively high rate of return and has a number of tax benefits.

PPF stands for Public Provident Fund. It is a long-term investment option offered by the Government of India that allows individuals to save money for their future financial needs while also receiving tax benefits. The PPF account can be opened at a bank or post office and requires a minimum deposit of 500 rupees per year.

One of the main features of the PPF is that it is backed by the Government of India, which gives investors a sense of security and stability. This is particularly important in a country like India, where many people do not have access to other forms of retirement savings or social security.

In order to open a PPF account, an individual must visit a bank or post office and fill out an application form. The minimum amount that can be deposited into a PPF account is Rs. 500 per year, and the maximum is Rs. 1.5 lakh per year. The money that is deposited into the PPF account earns a fixed rate of interest, which is set by the Government of India and reviewed on a quarterly basis.

One of the main benefits of the PPF is that it offers a tax-free rate of return. This means that the interest earned on the PPF is not subject to income tax. In addition, the money that is deposited into the PPF is eligible for a tax deduction under Section 80C of the Income Tax Act. This can be a significant advantage for investors who are in a high tax bracket and looking for ways to reduce their tax liability.

Another benefit of the PPF is that it has a long-term lock-in period. The account must remain open for a minimum of 15 years, after which it can be extended in blocks of 5 years. This can be a good option for people who are saving for a long-term goal, such as retirement, and want to ensure that their money is not easily accessible.

Interest on the deposited amount is calculated on a compounded basis and is tax-free. The current interest rate on PPF is 7.1% per year. The interest is calculated on the lowest balance between the close of the fifth day and the end of the month.

There are a few other important rules and regulations that investors should be aware of when it comes to the PPF. For example, the account can only be opened in the name of an individual, and not in the name of a trust or an organization. In addition, the account cannot be transferred to another person, and it cannot be used as collateral for a loan.

In addition to the tax benefits, the PPF is also a safe investment option as it is backed by the Government of India. This means that there is very little risk of the invested money being lost.

If an individual decides to withdraw the entire amount after the maturity period, they will not have to pay any taxes on the withdrawn amount. This makes the PPF a tax-efficient investment option as the interest earned and the maturity proceeds are tax-free.

In addition to the tax benefits and safety, the PPF also offers reasonable returns. While the interest rate on the PPF may not be as high as some other investment options, it is generally higher than the rate of inflation, which means that the purchasing power of the invested money will not decrease over time.

It is important to note that the PPF is a long-term investment option and is not suitable for individuals who need access to their money on a short-term basis. This is because the PPF has a lock-in period of 15 years and premature withdrawal is not allowed except in certain circumstances such as the account holder’s death or disability.

It is important to note that the PPF has a few rules and regulations that investors should be aware of. For example, the account can only be opened in the name of an individual, and not in the name of a trust or an organization. In addition, the account cannot be transferred to another person, and it cannot be used as collateral for a loan.

Eligibility:

  • Any resident individual in India can open a PPF account, including minors (with a guardian as the account holder).
  • Non-resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not eligible to open a PPF account.

Opening an Account:

  • A PPF account can be opened at any branch of a bank or a designated post office in India.
  • To open an account, an individual must fill out an application form and submit it along with the required documents (proof of identity, proof of address, and two passport-size photographs).
  • The minimum amount that can be deposited into a PPF account is Rs. 500 per year, and the maximum is Rs. 1.5 lakh per year.
  • An individual can open only one PPF account in their name.

Depositing Money:

  • Money can be deposited into a PPF account through cash, cheque, or demand draft.
  • Deposits can be made at the bank or post office where the account was opened, or at any other branch of a bank or post office that offers the PPF scheme.
  • Deposits must be made in multiples of Rs. 50, and a maximum of 12 deposits can be made in a financial year.

Interest Rate:

  • The PPF earns a fixed rate of interest, which is set by the Government of India and reviewed on a quarterly basis.
  • The interest rate is compounded annually, which means that the interest earned in a year is added to the principal amount, and the interest is calculated on the increased principal for the next year.
  • The interest rate on the PPF is currently 7.1% per year.

Tax Benefits:

  • The interest earned on the PPF is tax-free, which means it is not subject to income tax.
  • The money that is deposited into the PPF is eligible for a tax deduction under Section 80C of the Income Tax Act. This means that the amount deposited into the PPF can be claimed as a deduction from the investor’s total taxable income, up to a maximum of Rs. 1.5 lakh per financial year.

Lock-in Period:

  • The PPF has a long-term lock-in period of 15 years.
  • After the initial 15-year period, the account can be extended in blocks of 5 years.
  • An account can be extended any number of times, but it must be done before the maturity date.
  • If an individual decides not to extend their account, they can withdraw the money at the end of the 15-year period.

Withdrawals:

  • An individual can make partial withdrawals from their PPF account after the completion of 7 years from the end of the financial year in which the account was opened.
  • A maximum of one withdrawal is allowed in a financial year, and the amount that can be withdrawn is limited to 50% of the balance at the end of the fourth year preceding the year of withdrawal or the end of the preceding year, whichever is lower.
  • An account holder can also make a premature closure of their PPF account in exceptional cases, such as serious illness or higher education of the account holder or their dependents.

Loan Facility:

  • An individual can avail of a loan against their PPF account between the third and sixth financial years from the end of the financial year in which the account was opened.
  • The loan amount is limited to 25% of the balance at the end of the second year.

Overall, the Public Provident Fund is a popular and reliable savings option in India. It offers a high rate of return, tax benefits, and a long-term lock-in period, which makes it a good choice for individuals who are looking to save for their retirement or other long-term financial goals.