The Public Provident Fund, or PPF, is a widely used long-term, tax-efficient savings scheme supported by the government with numerous benefits. Encouraging savings and giving individuals financial security was the primary objective of designing this scheme.
This scheme is perfect for investors who are risk averse but want to see long-term financial growth. Anybody can invest in the scheme, regardless of whether they are employed or self-employed. It provides assured returns. Every quarter, the government reviews its interest rate. This implies that the PPF interest rate is subject to quarterly changes by the government.
However, the current interest rate for PPF stands at 7.1% for individuals.
Eligibility for the Public Provident Fund: Indian citizens can open a Public Provident Fund (PPF) account in their own name. A PPF can also be opened by the child's parents or legal guardians in the name of a minor child. However, as per the laws that are currently in practice, PPF accounts cannot be opened jointly, and Hindu Undivided Families (HUF) are also not eligible to open PPF accounts. In addition, non-resident Indians (or NRIs) cannot register for a new PPF account. However, suppose the PPF account was opened before the subscriber became a non-resident. In that case, the PPF account can continue until its maturity date even though the subscriber is no longer a resident of India. However, NRIs are not permitted to have their PPF accounts extended once the account has reached maturity.
The Interest Rate on the PPF for 2023: The amount of interest paid on Public Provident Fund accounts is subject to periodic adjustments made by the Central Government. Throughout its history, the interest rate on the PPF has typically ranged from 7.6% to 8%. Depending on the general economic conditions, it tends to shift ever slightly upwards or downwards. The interest rate that will be applied to PPF accounts for the third quarter of the fiscal year 2023-2024 (October-December) will remain unchanged at 7.1% per year when compounded.
Compared to the rates many banks offer for fixed deposits (FDs), the Public Provident Fund offers interest benefits to its significantly greater subscribers.
Tax Advantages of Investing in a PPF: A limit of Rs. 1,50,000 on the tax exemption can be claimed under section 80C. There is no tax on interest income. It is not subject to taxation either when it is being accumulated or when it is being received.
A premature withdrawal is not subject to tax either. PPF is taxed according to the EEE model, which stands for "Exempt-Exempt-Exempt." This means that both the interest generated, and the maturity amount are free from taxation at the time of maturity.
The third exemption is related to the proceeds received from the PPF account upon its maturity. The revenues from the maturity of a PPF account are not subject to either the wealth tax or the capital gains tax. When minors make deposits, their parents may be eligible for a tax deduction under Section 80C of the Income Tax Act.
The entire amount that a parent and a minor can contribute cannot exceed Rs.1,50,000; hence, the total amount that can be deducted under Section 80C cannot exceed Rs.1,50,000 under any circumstances.
Documents needed to create a PPF account:
- A recent passport-sized photo
- Identity Proof copy with original to verify (PAN card may also be acceptable since all taxpayers own it).
- Address Proof copy alongside the original to verify Form for opening a PPF account PPF account payment slip
PPF nomination form PPF Account opening: PPF Account can be opened at any approved bank or post office.
- Minors are also eligible to open PPF accounts.
- It is not available for joint names to open.
- HUF and NRI are ineligible to open a PPF account.
On the other hand, if an individual creates a PPF account when he is a resident of India and later becomes an NRI, he will be permitted to keep investing in his account. The account holder may appoint a nominee. However, the nominee cannot keep the account open after the holder dies. The account opening date is the day the check is realized in the government account.
A PPF account cannot be opened or managed by the power of the attorney holder. On behalf of their underage grandchild, the grandfather or grandmother is not permitted to register for a PPF account.
Additionally, only one PPF account can be opened by an individual. Transferring an account from one bank or post office to another is possible. Amount to be deposited in PPF Account: Rs.1.5lakhs is the maximum amount that can be deposited in a year. A minimum of Rs. 500 must be deposited annually after opening a PPF account.
The annual financial penalty for nonpayment is Rs.50. The amount can be deposited up to twice a month and up to 12 times annually. Deposits must be made in multiples of Rs. 100 and a minimum amount of Rs. 500. The money can be deposited online or with a cheque or cash.
Period and Lock in period for PPF account: The opening of a PPF account is done for 15 years. However, if the account is about to expire, it can be renewed for up to 5 years at a time. Each extension can be for 5 years and extended for an unlimited number of times.
PPF Amount Withdrawal: In the case of a PPF account, it is possible to withdraw the entire amount of money after the maturity period, but there is a lock-in period of 15 years for withdrawing the amount.
On the other hand, premature withdrawals are permitted beginning at the end of the sixth financial year after the year in which the account was initially formed. There is a maximum amount that can be withdrawn prematurely, and it is equivalent to 50% of the amount that was in the account at the end of the fourth year before the year in which the amount is withdrawn or the end of the year before that, whichever is lower. The total amount can be withdrawn when the maturity period has reached 15 years.
PPF account closure: The subscriber can apply to the bank or post office handling the PPF account to close it after maturity or the extension period.
However, premature account closure has some restrictions:
PPF accounts can only be prematurely closed after 5 years. Therefore, a PPF account can only be closed 7 years after its opening date.
A PPF account can only be prematurely closed for further higher education, residency status change, or to arrange funds for a severe sickness.
The subscriber will also earn 1% less interest than the amount they would have gotten if they continued the account in the PPF.
This 1% penalty may seem negligible, but this lower interest rate starts from the account opening date. Suppose a PPF account subscriber has earned 8% interest for 10 years.
Premature PPF account closure will be calculated at a lower interest rate earned of 7%. This reduces PPF account returns at the time of premature withdrawal.
Account Extension beyond 15 Years: Account holders can extend the account's tenure beyond the default tenure of 15 years. Blocks of five years may be added to a tenure, either with or without further financial investments. Extensions are only permitted for a period of one year following the date of maturity. The account can continue to generate interest on the balance accumulated until the end of the 15th year if no new investments are made after maturity.
In this case, the money can be freely withdrawn once per financial year. If new investments are made after maturity, the interest rate will be determined using the account's available balance. In this case, withdrawals are limited to a maximum of 60% of the balance in the account at the beginning of each five-year extension period.
PPF Forms: Form A – Used to open a Public Provident Fund (PPF) Account
Form B – Used to deposit amount in the PPF Account or to repay the loans taken against the PPF account
Form C – Used to make partial withdrawals from a PPF account
Form D – Used to request a loan against a PPF account
Form E – Used to add a nominee to a PPF account
Form F – Used to make any changes to PPF account nomination information
Form G – Used for claiming funds in a PPF account by a nominee/legal heir
Form H – Used to extend the maturity period of a PPF account
