Understanding the Public Provident Fund (PPF)

Image of Indian currency rolled in bundles, placed on a desk and jars of Indian notes and coins placed on a sheet of paper that says PPF (Public Provident Fund) and has a sticky note in the corner which says 'SAVE TAX". There are also 2 pencils on the sticky note

Co-authored by Smriti Bansal

There are plenty of factors to consider when choosing an investment option (explained in detail in our article and free eBook that you can download). Finding an option in which we can invest our earnings and get security along with good returns is a real challenge. In fact the dream investment option is one that offers low risk and high returns. The Public Provident Fund in India, commonly known as PPF, is one such gem among the plethora of options available in the financial market today.

We aim to walk you through the features and benefits of the PPF through this article.

What is a PPF account?

As this investment option is backed by central government of India, there are minimal chances of losing the principal amount. Moreover, a good compound interest rate makes it an attractive option.

Why should you open a PPF Account?

The interest rates for PPF are fixed by the central government and are usually higher than other fixed income instruments such as Fixed Deposits (FDs) and Recurring Deposits (RDs).

Return on investment (ROI) concept: Human hands holding stacks of golden coins and green umbrella tree on blurred nature background, Image depicts how the PPF is a secure investment option
Return on investment (ROI) concept: Human hands holding stacks of golden coins and green umbrella tree on blurred nature background, Image depicts how the PPF is a secure investment option
The PPF is more advantageous compared to other fixed investment options since it is completely secure, while the other options are only partially secure

More importantly, the principal and interest amounts remain completely secure, as the plan is backed by the central government. This scheme can hence be utilized for long-term investment purposes as it gives good returns along with security of your funds.

Who can open a PPF account?

  • Only an Indian resident can open a PPF account
  • NRIs are not eligible to open PPF accounts. However, a resident Indian who has become an NRI after opening an account can continue the account until maturity
  • Parents/guardians can also open PPF accounts for their minor children
  • Opening of joint accounts and multiple accounts is not allowed

The basic features of a PPF account

Image of a laptop key[ad with a 500 rupee note and some 10 rupee coins stacked on them. The image indicates saving or investing money.
Image of a laptop key[ad with a 500 rupee note and some 10 rupee coins stacked on them. The image indicates saving or investing money.

Lock-in tenure

We should opt for this investment only if we can commit to not having access to our funds for such a long time.

There are some provisions which enable us to withdraw a certain amount after 5 years for things such as health emergencies or children’s education. However, it’s important to note that this comes at an interest penalty of 1% applicable from the date of account opening to the date of withdrawal.

We can only open one PPF account in a lifetime. However, we do have the choice to extend the tenure of our PPF account in a block of 5 years. And there is no limit to number of extensions one can make to PPF account.

Minimum and maximum investment

If we are unable to make the minimum investment of ₹500 in our PPF accounts, the account gets deactivated.

Tax treatment

The interest earned and the maturity amount is completely exempt from taxes.

This makes this investment avenue extraordinarily lucrative for investors.

Loan against PPF account

Rubber stamping that says 'Loan Approved'.
Rubber stamping that says 'Loan Approved'.

The maximum tenure of such loans is 36 months. Also, we can only claim 25% or less of the total amount available in the account for loan purposes.

Withdrawal of PPF

As of 2020 the maximum amount that can be withdrawn per financial year is the lower of the following:

  1. 50% of the account balance as at the end of the financial year, preceding the current year, or
  2. 50% of the account balance as at the end of the 6th financial year, preceding the current year.

To conclude…

In order to reap good benefits from the PPF, we should start early with this plan.

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Disclaimer: This article is for educational purposes only. It should not be considered financial or legal advice. Please consult a financial professional before making any significant financial decisions.

Lokyatha is an education focused initiative to enable young adults to live better, more fruitful lives by delivering real world life skills.

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