Overview of the Public Provident Fund

The Public Provident Fund (PPF) is a long-term savings instrument established by the Central Government. It offers tax benefits on contributions as well as withdrawals after the lock-in period. This scheme came into force on July 1, 1968, and is backed by the government with the objective of providing old-age income security to the self-employed and those working in the unorganised sector. Though the scheme is voluntary, assured returns and income-tax benefits have fuelled its popularity. Savings in this product are completely risk-free because of government backing.

Capital Protection & Inflation Protection
The capital in a PPF account is completely protected as the scheme is backed by the Government of India, making it fully risk-free with guaranteed returns. The PPF account is however not inflation protected, which means whenever inflation is above the latest guaranteed interest rate, the deposit earns no real returns. However, when the inflation rate is below the guaranteed rate, it does manage a positive real rate of return.

Guarantees
Interest rates are aligned with G-sec rates of similar maturity, with a spread of 0.25 per cent. The government has decided to review the PPF rates quarterly. For the second quarter of FY 21-22, the rate has been set as 7.10 per cent compounded annually.

Liquidity
The PPF is liquid, despite the 15-year lock-in stipulated with this account. Liquidity is offered in the form of loans against the PPF from the third year and withdrawals subject to certain conditions. In a financial year, one withdrawal of up to 50 per cent of the balance at the end of the fourth preceding year or at the end of the preceding year, whichever is lower, can be made (i.e. withdrawal can be taken in 2021-22, up to 50% of balance as on 31.03.2018 or 31.03.2021 whichever is lower) . However, this withdrawal can be made from seventh year onwards only.

Tax Implications
The scheme has exempt-exempt-exempt (EEE) status, where the deposits, the interest earned as well as the maturity amount are tax-free.

The sum invested in the PPF account is eligible for tax deduction under Section 80C subject to a maximum of Rs 1.5 lakh in a financial year. On maturity the entire amount including the interest is tax free.

Where to Open an Account
You can open the account at various places such as:

• Any head post office or general post office
• Branches of nationalised banks: State Bank of India, Bank of Maharashtra etc.
• Private-sector banks: ICICI Bank, Axis Bank etc

How to Open an Account
Once you have selected the location to open an account, you will need the following:

• An account-opening form
• Two passport-sized photographs
• Address and identity proof such as the Aadhaar card, passport, PAN (permanent account number) card or declaration in Form 60 or 61 as per the Income Tax Act, 1961, driving licence, voter's identity card or ration card
• Carry original identity proof for verification at the time of account opening
• Choose a nominee

How to Operate a PPF Deposit

• You need a pay-in slip with the initial account-opening sum to be credited into your account
• You get a PPF passbook with your photo affixed, stating the nominee's name
• You can also manage your PPF account online via net banking

Exit Option
Earlier, premature closure of a PPF account was not allowed. However, it is now possible to close your PPF account pre-maturely at a penalty of one per cent on the interest. But it can be done only after the completion of five years from the end of the financial year in which the account is opened, provided the money is required for the treatment of serious ailments of the account holder, spouse or dependent children, for higher education of the account holder or dependent children or change in residency status to NRI.

Tips and Strategies

• Exhaust the full investment permissible to avail tax deduction on the first day of each financial year. This will ensure that your yearly investment earns interest for the complete year, enjoys the compounding effect and accumulates a significant sum over the long term.
• Deposit the PPF contribution between the first and fifth of the month to earn interest for the whole month.

Features at a glance
Eligibility: You need to be a resident Indian

Entry age: No age is specified for account opening

Minimum Investment: Rs 500 per annum

Maximum Investment: Rs 1.5 lakh per annum
No limit on the no. of installments in a financial year (earlier it used to be 12)

Interest: 7.1 per cent compounded annually for the period July-September, 2021. Interest rates are subject to revision every quarter.

Tenure:

• 15 years
• The PPF account matures after 15 years but the contribution has to be made for 16 years in all. This is because the 15-year period is calculated from the financial year following the date on which the account is opened.
• On completion of 15 years, the account can be extended with or without deposit in block of five years at a time. There is no limit on the no. of extensions.

Account-holding categories:

• Individual
• Minor through the guardian

Nomination Facility: Available