What is PPF?
Public Provident Fund (PPF) is a highly sought-after investment option for building a long-term retirement fund due to its low risk, moderate returns, and added tax benefits. PPF's attractive features make it a popular choice among investors. With an assured return rate of 7.1%, PPF's performance is on par with bank fixed deposits (FDs) in terms of nominal returns. Moreover, the additional tax benefits offered by PPF, subject to the investment cap of Rs. 1,50,000, make it more attractive than other investment options.
One of the most significant advantages of investing in PPF is that the deposits are government-guaranteed, making it a safer investment than other financial instruments like FDs. Furthermore, there is no age limit for opening a PPF account, making it accessible to both adults and minors. In the case of minors below 18 years of age, a guardian must operate the account on their behalf until they reach the age of 18. In conclusion, PPF is an excellent investment option for those looking to build a long-term retirement fund. Its low risk, moderate returns, and added tax benefits, coupled with the government guarantee, make it an ideal choice for conservative investors.
Benefits of PPF
1. Investment Option with Minimal Risk and Assured Returns
One of the biggest advantages of having a PPF account is that it is very safe. This is because the scheme is supported by the Indian government, which means the risk of losing your money is very low. Additionally, the returns you can get from the scheme are good. Another benefit is that if you have any debts that you are unable to pay, they cannot be seized by a court order.
2. Tax Benefits
It is completely tax-free. When you invest in a PPF account, you can get tax deductions under section 80C of the IT Act. The entire taxation of interest income is also prohibited. Wealth tax is completely waived on any balance due on a PPF account. Additionally, the entire value of your investment is exempt from taxes, making it a very efficient way to save on taxes.
3. Invest with Little Money and Earn Good Returns
You can start your PPF account with just Rs 500 and invest up to a maximum of Rs 1,50,000, depending on how much you can afford. You can make small monthly payments or one deposit every year. The interest rate for a PPF account is 7.1% and it's calculated every year, so your money can grow quickly over time.
4. Loan and Withdrawal
One of the best things about having a PPF account is that you can take loans against it. After maintaining the account for 3 years, you can borrow up to 25% of the balance, even though the account has a 15-year lock-in period. This is very helpful in case of emergencies. After 6 years, you can also start taking out some money from your account if you need it. If you can't afford to keep the account open anymore, you can also close it. This is another great benefit of having a PPF account.
5. Tenure
Once you have completed the 15-year lock-in period, you can choose to withdraw all the money from your PPF account. Alternatively, you can also extend the lock-in period in blocks of 5 years if you want to keep the account open and continue earning interest.
PPF interest rate for April-June quarter 2023
The PPF interest rate, on the other hand, has remained unchanged at 7.1%.
New rule to open PPF account
The Indian government has made it mandatory to provide PAN and Aadhaar numbers for investments in post office schemes like Public Provident Fund (PPF). This new rule was announced on March 31, 2023. Previously, it was possible to invest without disclosing your Aadhaar number. However, to invest in small savings schemes, you now need to have an Aadhaar enrollment slip or number.
Who cannot open PPF account?
- You must be an Indian citizen to open a PPF account.
- Only one PPF account is allowed per person.
- HUF and Non Resident Indians are not eligible to open PPF account.
PPF tenure
A PPF account has a 15-year term, but you can extend it for one or more blocks of five years without any penalty. To do so, you need to make a written request within one year of maturity. You can transfer your PPF account to and from permitted branches of nationalized or private sector banks or Post Offices by submitting a request letter to the existing accounts office.
When is PPF account treated as discontinued?
If a PPF account holder fails to pay the minimum subscription fee of Rs 500 in a fiscal year, the account will be discontinued. In this case, the account holder will not be able to get a loan or make a partial withdrawal unless the account is revived. It is not possible to open another PPF account while the original one is discontinued.
PPF maturity
Once a PPF account matures, it can be continued without any fresh deposits. The balance will continue to earn interest at the prevailing rate. Once a year, the account holder is permitted to withdraw any amount from the account.
How can a discontinued account be revived?
If a PPF account is discontinued due to non-payment of the minimum subscription fee, the subscriber can reactivate the account by paying a penalty of Rs. 50 for each year the account was inactive, along with the subscription fee of Rs. 500 for each year. This will allow the subscriber to resume making deposits and enjoying the benefits of the PPF account.
Premature closure of the PPF account
A PPF account can only be closed prematurely after it has completed five financial years, and the account holder or the minor account holder, for whom they are the guardian, must meet certain criteria. Premature closure is allowed for two reasons: higher education expenses of the account holder or the minor account holder, or the treatment of serious illnesses or life-threatening diseases of the account holder, their spouse, dependent children, or parents. The account holder must provide supporting documents, such as admission confirmation from a recognised institution of higher education in India or abroad, or medical bills related to the treatment of the aforementioned individuals.
Death of the subscriber
When a PPF account holder passes away, their nominee or legal heirs will receive the remaining balance in their account. The process involves submitting relevant paperwork to claim the balance amount.
Special Investment tip
If you have a Public Provident Fund (PPF) account, it's important to deposit your contribution for the financial year 2023-24 before April 5 to get the maximum benefit. If you deposit after April 5, you'll earn lower interest. The interest is calculated based on the lowest balance in the account at the end of the fifth day of a month and end of the month. So, if you're making a lump sum investment, make sure it's credited into the PPF account by April 5. Interest is calculated every month but is credited at the end of the financial year. So, if you make monthly payments, make sure the money is credited into the account before the fifth of every month to earn higher interest. If you deposit Rs 1.5 lakh into your PPF account before April 5, you'll earn interest of Rs 10,650. If you deposit after April 5, you'll lose out on the interest of the first month and earn only Rs 9,763 for the financial year. PPF is a long-term investment scheme with a lock-in period of 15 years. Investing Rs 1.5 lakh between April 1 and April 5 every financial year will fetch an interest of Rs 18,18,209 and a maturity amount of Rs 40,68,209. But, if you make a lump sum investment towards the end of the financial year, you won't get any interest for that year. Investing in the PPF account before April 5 will help you earn more tax-exempt interest. Making a lump sum investment every financial year will earn you a higher interest than making monthly deposits. If you make a PPF investment of Rs 12,500 before the fifth of every month, you'll get a maturity amount of Rs 39,44,599. By making a lump sum investment into the PPF account between April 1 and April 5 of a financial year, you'll earn extra interest of Rs 1,23,610.
Conclusion
Other government-backed investment schemes like Senior Citizens' Saving Scheme, National Savings Certificate, Sukanya Samriddhi Yojana, and Mahila Samman Savings Certificates offer interest rates ranging from 7.5% to 8.2%, which are higher than the current PPF rate of 7.1%. Some fixed deposit schemes are also offering good returns in the current high-interest rate scenario. The PPF rate was last changed in April-June 2020 when it was reduced to 7.1% from 7.9%, and prior to that, it was cut in July-September 2019. The rate was last increased in October-December 2018 to 8% from 7.6%. Even though the rates for PPF have not been increased, financial experts still consider it a good investment option. This is because contributions, withdrawals, and returns generated during the holding period are all tax exempt. PPF is available to all and its tax-free status makes it one of the best debt options available. Other schemes like SSCS, SSY, and MSSC may offer higher rates, but post-tax returns will not match those from PPF. PPF is also a safe and stable investment option with a sovereign backing. Interest on the amount deposited in PPF is calculated every month, but it is credited into the account at the end of the financial year. Depositing money before the fifth of the month can result in the maximum amount of interest on interest. Experts also suggest that investing in large-cap equity can provide higher returns than PPF over a 15 year horizon, but there is a long-term capital gains tax on equity. The current tax laws may change in the future, so investors should make informed decisions based on their current knowledge.
The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.
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