We all have many goals, and one of the most important ones is to save for retirement. In today's world, many want to retire as early as possible to live life on their own terms and have enough put away to do so. Consistently investing and building a discipline early on will help you meet your goal faster.
What is a Public Provident Fund?
One of the most important asset classes to consider is fixed income, which is considered to be a safe option for any investment portfolio. Within this asset class, the Public Provident Fund (PPF) has been a staple for investors since 1968, when it was first launched in India. If you're wondering - "what is a PPF?" - you're in the right place. This is a unique instrument because it comes with multiple benefits and enables you to build a retirement corpus through the power of compound interest.
EPF vs. PPF
Employee Provident Fund (EPF) is offered to employees by companies registered with the Employees' Provident Fund Organization. In this scheme, the company and an employee make an equal contribution, enabling the employee to get a tax benefit and accrue interest at 8.1%. On the other hand, individuals start PPFs and are not affiliated with any employer. The interest rate is 7.1 %, and the National Savings Institute introduced the scheme.
An Ideal PPF Investor Profile
Being a government-backed savings scheme, a PPF is considered a safe investment option.
- Since a PPF is not affected by market volatility, you can rest assured that your funds are safe. Investors with a higher risk appetite are also advised to have PPF accounts as a way to diversify their portfolios and contribute to their retirement fund. During choppy markets, the value of the PPF is not impacted.
- Unlike the Employee Provident Fund, you do not need to be employed in the organized sector to open an account. A PPF account holder can be employed, self-employed, or even retired.
- Even if you have an employee provident fund, you can still opt to open a PPF account alongside.
- Those starting their first jobs and those who are retired can start PPF accounts.
- A PPF can also be opened for minors and handled by their parents or guardians until they turn 18.
- Eligibility: You have to be an Indian resident to open a PPF account
- Tenure: 15 years (can be extended in 5-year blocks any number of times)
- Minimum investment: INR 500 per annum
- Maximum investment: 1.5 lakhs per annum
- Tax benefit: Up to INR 1.5 lakhs per annum under Section 80C
- Interest rate: 7.1 %
- Taxation category: Exempt-Exempt-Exempt
- Number of accounts per person: One
- A unique aspect of a PPF is that it is completely exempt from taxes. In other words, when you withdraw funds from your PPF account, you need not pay any taxes on it.
- The interest rate for a PPF is one of the highest for a fixed interest instrument at 7.1%, and it also comes with a tax benefit from year one. On the other hand, not all fixed deposits come with a tax benefit, and the maturity amount is taxable once it lands in your savings account.
- The interest for a PPF is compounded annually.
- You also have the advantage of depositing as little as INR 500 a year while also being able to pay up to INR 1.5 lakhs per year in installments as per your convenience.
- You can claim up to INR 1.5 lakhs in tax deductions under Section 80C of the Income Tax Act per annum.
- A PPF is one of the safest investments, as it is government-backed and not linked to market instruments. Market volatility does not impact the value of your PPF account balance, and it provides guaranteed returns.
- You can take a loan on your account between the third and sixth year for a maximum tenure of three years. The loan amount cannot exceed 25% of the total available amount. A second loan can be taken out prior to the sixth year if the first loan is repaid fully.
- Upon maturity, you can choose to extend your tenure in blocks of five years. There is no upper limit, and you can continue extending it indefinitely once the block matures.
- Account-holders are allowed to nominate one person. This is very important so that your next of kin, or someone you name, will have access to your account in case of your demise or any other unfortunate circumstances.
Any resident Indian above 18 can open a PPF account and accrue interest on their balance, even if they do not earn an income. However, those without income will not be able to avail themselves of tax deduction benefits.
Guide to Opening Your PPF Account
Today, you can choose to open and operate a PPF account through various channels, based on which is most convenient:
- With the post office
- Nationalized banks like the State Bank of India, Central Bank of India, Punjab National Bank, Bank of India, Bank of Maharashtra, Union Bank of India, and Bank of Baroda
- Private banks like ICICI, HDFC, Kotak Mahindra Bank, IDBI Bank, Axis Bank, and Oriental Bank of Commerce
When opening a PPF account, be sure to keep the following documents handy:
- Correctly filled PPF account opening application form
- KYC documents including Aadhaar Card, PAN Card, Voters ID, Driving license
- Proof of residential address
- Nominee declaration form
- Passport size photograph
Once the documents are submitted, deposit a minimum of INR 100 to activate the account. You have to deposit a minimum of INR 500 to keep the account active per annum.
Benefits of Internet Banking
While you can submit a physical application form at the bank or post office to open your account, you can also consider opening it online. Internet banking brings a certain ease of use to managing deposits, loans, and redemptions. You can also activate automated monthly payments through your bank to ensure consistency and discipline in investing.
When to Deposit Money in Your PPF Account?
Being more strategic when depositing funds can help you maximize returns. In the case of a PPF, interest is calculated between the fifth and last day of the month. So keep these guidelines in mind when planning your PPF investments:
- You can spread your deposits weekly, monthly, quarterly, or annually. You can also deposit sporadically, based on what cycles are convenient to you.
- You should deposit funds before or on the 5th of every month to maximize interest benefits.
- Another approach to maximizing benefits is to deposit a lump sum of up to INR 1.5 lakhs between the 1st and 5th of April. This gives the funds more time to earn maximum interest.
- A deposit of INR 500 per year is necessary for the account to stay active. You will need to pay INR 50 to reactivate the account for every year of inactivity and INR 500 for every year the contribution was missed.
Will the Interest Rates Change?
The Ministry of Finance sets the interest rates across all government-backed instruments every year. From 2009 to 2019, the interest rate for PPFs rose to 8.7%. As of 2022-2023, the PPF interest rate is set at 7.1% per annum, which compounds annually.
How Much Can You Earn?
Investors who start investing early and max out their accounts every year can reap the highest benefits from this interest. By using a PPF calculator, you can get an estimate of potential earnings. However, if you were to invest up to INR 1.5 lakhs per year for 15 years, with an interest rate of 7.1%, you could receive a non-taxable maturity amount of INR 40 plus lakhs. On the other hand, if you were to invest only INR 500 per year, then the maturity amount would be INR 13,561.
PPF Withdrawal Rules
It's important to remember that a PPF is a long-term investment with a tenure of 15 years. Here are some important rules to keep in mind:
- You can withdraw the complete PPF account along with the interest balance only upon maturity.
- If you require funds before the maturity date, there are some exceptions. Partial withdrawals are possible after a PPF account completes five years.
- The rules for premature withdrawals are as follows - you can withdraw up to a maximum of 50% of the amount present in the account at the end of the 4th financial year of opening the account.
- Withdrawals are only possible once during any financial year.
- The PPF account cannot be closed before maturity.
Note: On maturity, you can choose to keep the funds in the account and allow it to continue accruing interest. You can also renew the PPF account in five years by filling out Form H and continuing to invest in it. If you continue contributing without filling out form H, then the account will no longer continue to accrue interest, and the deposited amount will also not be considered for tax deduction under Section 80C.
What Are the Advantages of Investing in PPFs in Terms of Saving Tax?
A PPF falls under the Exempt-Exempt-Exempt (EEE) category. This means that:
- You can get a tax deduction of up to INR 1.5 lakhs under Section 80C of the Income Tax Act per financial year.
- The interest and maturity amount are also exempt from tax.
- Partial withdrawals from PPF accounts are also exempt from taxes.
Rules for Loans on Your PPF
Ideally, you should take a loan on your PPF only if the amount is small and you are in a position to pay it off quickly:
- The loan amount should not exceed 25% of the amount present in your PPF account at the end of the second year preceding the year you applied for the loan.
- You must pay off the loan within three years.
- With PPFs, any loan taken against the account is charged at 1% interest, irrespective of the amount.
- One disadvantage of taking a loan on your PPF account is that it does not earn any interest unless the loan is fully paid back.
How to Close a PPF Account?
As per PPF guidelines, you can fully withdraw your PPF balance only after the account matures in 15 years. You can withdraw the full amount and then shut the account upon completing this tenure.
However, there are some unique circumstances under which a PPF account can be closed prematurely. For instance, if the account-holders, their parents, spouse, or dependent children are diagnosed with a terminal illness, then these are grounds for premature closure. The other situation is if the account holder wants to leverage the funds for higher education. The relevant documents will need to be furnished in both cases.
A PPF is a preferred long-term savings scheme among a wide profile of investors. Even if you have an EPF account with an employer, you can also start a PPF account and avail yourself of all the tax and interest benefits. From a homemaker to a gig worker, everyone can open an account and start their savings journey.