PPF is a savings scheme backed by government that aims to offer a safe and secure post-retirement life to people
Updated on: 07-Jul-2022
What is 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 to provide 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.
Features of PPF
Investment objective and risks
The primary objective of saving in the PPF account is to avail tax deductions on deposits, guaranteed returns on investment and tax-free withdrawal on the maturity. Savings in this product are completely risk-free because of the government backing.
Suitability and alternatives
Capital protection and 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 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 the similar maturity, with a spread of 0.25 per cent. The government has decided to review the PPF rates quarterly. For the fourth quarter of FY21-22, 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 are subject to conditions from the seventh year.
Also, it is now possible to close your PPF account pre-maturely at a penalty of 1 per cent on the interest. However, it can be done only after 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 the higher education of the account holder or dependent children or change in residency status to NRI.
Tax implications
The scheme has the 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 Public Provident Fund
Once you have selected the location to open an account, you will need the following documents:
How to operate a PPF deposit
To view the current rates on the schemes, go to vro.in/s34211
