PPF account offers tax deduction on deposits, guaranteed returns on investment and tax-free withdrawal on maturity
14-Sep-2021 •Research Desk
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.
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.
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.
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:
How to Open an Account
Once you have selected the location to open an account, you will need the following:
How to Operate a PPF Deposit
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
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.
Nomination Facility: Available