What is a PPF Account?

 

A Public Provident Fund account is a long-term savings account which provides tax benefits to resident individuals. It is a sovereign-backed investment avenue hence there is a guarantee and zero chance of default.

 

It was started in the year 1968 by the government to provide security and long-term savings option for wealth creation to self-employed people. Since then PPF has been widely used as an investment avenue for long-term horizon with sovereign guarantee and added tax benefits.

 

Feature of PPF

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Below mentioned are the features of the PPF account.

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Tenure – The tenure of PPF account investment is 15 years from the date of the first investment, which can be extended indefinitely in blocks of 5 years.

 

Deposit Limits – One can open a PPF account from a minimum investment of ₹ 500 per annum and can invest a maximum of up to ₹ 150,000 per annum. Investment can be made in lumpsum or in 12 instalments. It is advisable to deposit the money before the 5th of every month to get interest for that particular month. If one invests more than ₹ 150,000 no interest is paid on that additional amount and no tax benefits are provided for the same. The additional amount is refunded back to the investors.

 

Effective Interest Rates: PPF is a debt-oriented investment and not linked to equity markets, hence returns are not related to stock market performance. The interest rates are set by the government every quarter based on government yield. The interest becomes effective for both existing and fresh investors. Today in Q2 July 2023, the current effective interest rate is 7.1% p.a. The interest rates are reviewed every quarter by the government and changed as per the current yield on government securities.

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Tax Benefits: Investment in PPF account up to ₹ 150,000 p.a. avails deductions under section 80-C and the interest earned on the principal amount also gets tax exemption under section 10.

 

Number of accounts: One investor can open only one PPF account. One can open another account only as guardian to minor account. No joint account can be opened. Also, two individuals cannot open two minor accounts for the same child. One child can open only one account with one guardian, it can be either a father or mother.

Deposit frequency: One has to make one compulsory deposit in a PPF account in one financial year to keep the account active, and the same has to be done for the next 15 years.

 

Nomination: PPF account provides the provision for nomination as any other investments. Be sure to file the nomination at the time of account opening to avoid any hassles later on.

 

Attachment: The investment done in the PPF account cannot be attached to a court of law or any order. The PPF account however is liable to be attached by the Income Tax department in case of debt or liability of the investor.

 

Partial Withdrawal: You can withdraw up to 50% of the corpus accumulated from your PPF account after the completion of 7 financial years. The financial year begins from the year one made their initial contribution. One can make one partial withdrawal in each financial year.

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Loan: The loan facility is available on the PPF account. One can avail up to 25% of the account balance at the end of second financial year immediately preceding the year in which the loan is applied. The annual interest rate of 1% is applicable if the loan is paid under 36 months or else a 6% p.a. rate will be applicable.

Premature Closure: Earlier premature closure was not allowed in the PPF account. However now there have been changes made and one can make premature withdrawals after completion of 5 financial years and on specific grounds like medical emergency, treatment of serious ailments or life-threatening disease, supporting documents from medical authority needs to be submitted. In the case of higher education of the child, one can make premature closure of self-account or minor account. Documents like fee payment and confirmation of admission to recognized institutes need to be submitted.

 

How to start investing in PPF?

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One can visit a nearby Post office or any bank and can open a PPF account. One will have to fill out and submit one account opening form and KYC documents like a photograph, Pan card and Aadhaar Card. One can also open a PPF account through their existing bank online and operate their account.

 

Suitability – The Public Provident Fund is a very secure investment with a sovereign guarantee which makes it a better choice for investment for individual investors, also it provides taxation benefits on the investment done as well as on the maturity making it more lucrative. So, this Investment is basically for risk-averse investors who are not willing to take any risk. But compared to this for a longer horizon one can also look towards Equity linked Saving Scheme (ELSS) which is high on risk but is a good wealth creation avenue,