Public Provident Fund or as it is popularly called PPF is one of the best debt investment instruments available in India. It suits every kind of investor for one’s debt portfolio.
The Tax-free return backed by government guarantees makes it more attractive for investors. And above all the investment in Public Provident Fund is eligible for tax saving u/s 80C. All these features have made Public Provident Fund scheme a darling investment option.
Through this article, I will discuss with you, What is Public Provident Fund account?, the basic features of the Public Provident Fund scheme, the latest changes announced in PPF Scheme 2019, and why or why not one should consider investing in this.
Basic Features of Public Provident Fund:
1. Tenure: It is a 15 years product with 16 years lock-in. The first year of investment is not counted for 15 years maturity. If you have opened the PPF a/c on 15 July’2000, then 15 years tenure will start from the end of FY 2000-2001 i.e. 31st March 2001. The maturity date, in this case, would be 31st March 2016.
2. Deposit Limits: Minimum investment per financial year in Public Provident Fund scheme is Rs 500/- and w.e.f 1.12.2011 the maximum limit has been raised to Rs 1.50 lakh which was earlier Rs 1,00,000/- The deposit can be in one go or in a number of flexible installments not exceeding 12 per financial year.
Please note that Public provident fund (PPF) account can be opened with an initial deposit of Rs 500/- only.
As per PPF Scheme 2019 rules, deposits are allowed in the multiples of Rs.50 and there is no upper limit on the number of deposits per financial year.
3. Interest rates: The interest earned in Public Provident Fund remains fixed for one quarter and is no longer guaranteed forever. It is actually benchmarked to the 10-year government bond yield and will be 0.25% higher than the average government bond yield. This rate will be declared every Quarter.
The Interest is computed for a calendar month on the basis of the lowest balance in an account between the close of the 5th day and the end of the month and the Interest is credited to the account of the account holder at the end of the year. Thus it is advisable to deposit money in this before 5th of any month.
With effect from 1st April 2020, the public provident fund interest rate would be 7.10% p.a. (compounded Annually).
4. Account Holders :
a) Public Provident Fund account can be opened in the name of Individual (salaried or self-employed). NO HUF or association of person is allowed to open PPF a/c.
b) PPF account can also be opened in the name of a minor, person of unsound mind through guardian who can be father or mother or a person appointed by the court (if the guardian is not there). Thus Grandfather or Grandmother are not allowed to open a/c in the name of Grandchildren
Only one account is permissible to one individual. Thus if the father has opened an account in the name of the child, the mother cannot open the Public Provident Fund Account in the name of the same child.
c) No Joint account can be opened.
d) Non-Resident Indian (NRI) cannot open a new Public provident fund account in India. Prior to 2003, NRIs were not even allowed to make contributions into existing PPF accounts, that is, accounts opened before they became NRIs. However, in 2003, a notification (MOF (DEA) No GSR 585 (E) dated 25.7.2003) was issued permitting NRIs to continue investing in existing PPF accounts till maturity.
5. Premature withdrawal: Many people avoid this investment just because of the lock-in period of 15 years. They are not aware of the premature withdrawal facility available in this. In PPF accounts you are allowed to make partial withdrawals in times of financial crises. You are allowed to withdraw seventh year onwards from the date of account opening i.e. after the expiry of 5 years from the end of the financial year in which the account was opened and that too once a year. Such withdrawal figure must not exceed 50% of the balance at the end of the fourth year, or 50% of the balance at the end of the immediately preceding year, whichever is less.
Let’s suppose your account was opened on 8th August 2013 i.e. in FY 2013-14.
First withdrawal date: Add 6 to the financial year-end => 2014 + 6 = 2020. It shows that the seventh financial year would be 2019-2020.
Amount of first withdrawal: The 4th preceding year will be 2020 – 4 = 2016 (FY 2015-16) and the preceding year 2020 – 1 = 2019 (FY 2018-19). Amount withdrawable in the 7th year, FY 2019-2020 is 50% of the balance to the credit as on March 31, 2016, or March 31, 2019, whichever is lower.
6. Loan on PPF :
Loans could be taken from the third year onwards till the sixth year i.e. after the expiry of one year but before the expiry of five years from the end of the year in which the account was opened. Let’s suppose you opened your PPF account in December 2011 (in the FY 2011-12), you can avail a loan only in FY 2013-2014 (2012+2 = 2014) till FY 2016-2017 (2012+5=2017).
You can avail a loan amount of up to a maximum of 25% of the balance in your account at the end of the second year immediately preceding the year in which the loan is applied for.
If you apply for a loan in November 2013 (FY 2013-2014), you would get 25% of the amount that existed at the end of March 2012 (2014-2 = 2012).
Only one loan is allowed per individual per financial year. Second loan can be taken only after the first one is repaid in full.
As per PPF Scheme 2019 rules, the rate of interest charged on this loan would be 1% higher than the PPF rate. Previously this was 2%.
This loan is to be repaid by the account holder before the expiry of thirty-six months from the first day of the month following the month in which the loan is sanctioned.
For instance, if the loan was sanctioned on 25th January 2018, then the loan tenure of 36 months starts from the 1st of February, 2018. If the loan is not repaid within 36 months, interest would be charged @6% p.a. on the outstanding amount from the date of loan disbursal.
7. Discontinued accounts:
You need to deposit a minimum of Rs 500/- per Financial Year, failing which the account will be termed as a discontinued account. Interest would, however, continue to accrue. You could regularize the account again by paying the penalty fee of Rs 50/- for each year of default along with subscription arrears of Rs 500/- per Financial Year.
8. Continuation after maturity: After 15 years of continuation i.e. on maturity, the PPF account holder has 2 options, either to take out the maturity amount and close the account or to further extend it for the block of 5 years for any number of periods with or without further subscriptions.
However, interest can be earned on the balance, till the account is closed. If extended without contribution, any amount can be withdrawn subject to one withdrawal per year.
If extended with contribution, withdrawal up to 60 per cent of the balance at the beginning of each extended period (block of five years) is permitted.
Please note that, as per PPF Scheme 2019 rules, if any contribution is not made for 1 year after maturity, the account holder would not be allowed to contribute anything to that account, thereafter.
9. Tax benefits: Public Provident Fund in India offers multiple tax benefits. It offers Tax saving on deposit u/s 80C up to a maximum limit of Rs 1.50 lakh; also the interest earned in PPF enjoys tax-free status.
PPF Scheme 2019- Infographics:
The below infographics explains the changes in PPF Scheme 2019:
Other Important features of Public Provident Fund Account:
- The Public Provident Fund scheme is operated by Post Office and Nationalized banks. PPF account can be opened either in Post Office or in a Bank. These days even Pvt Banks like ICICI bank offers this account.
- The account is easily transferable between post offices or banks, even between post offices and banks.
- The balance amount in the Public Provident Fund account is not subject to attachment under any order or decree of the court in respect of any debt or liability, but it can be attached by the Income Tax and Estate Duty authorities.
- Nomination facility is available.
Should you invest in Public Provident Fund?
One thing is very clear that with the EEE (Exempt –Exempt – Exempt) nature of this product, this is a “Must have” investment account in one’s portfolio. Moreover the early you open this account, early you will get over with the lock-in period.
One should consider the following points before investing in this product.
- Taxation: Don’t look at tax-free interest only but also the income tax bracket you fall into. Some years back PPF rate was 8.6% and 10 years bank FD rate was 9.5%, so for the one who falls into 10% tax bracket, FD was looking more attractive option. But since it is a long-term investment and PPF assumed to remain tax-free option for quite a long time, so it looks good to invest for everyone. For other high-income bracket people, this investment is undoubtedly an all-time very good option.
- Asset Allocation: You have to consider the overall asset allocation, which has been designed for the achieving of your long and short-term goals. If you are already putting enough money in debt through compulsory EPF/GPF deductions, then you may not require PPF investment, but as I said earlier that this product should not be ignored also.
- Interest rates movement: If one is aware of how debt product actually performs with the interest rate cycle, then he/she can take advantage of the high rate by investing the portion in debt mutual funds, to take the benefit of fall of interest rates in future.
With the linkage of PPF rates with G sec yields, this is very much clear that we may find these rates to go down some year. One can recall those years when the G sec rates were in the range of 5.5%-6%. If that scenario has to repeat in the next few years (which is not sure) than Investment in Debt mutual funds would be a wiser choice at present. (Read: bank deposits vs debt mutual funds)
PPF or Public provident fund is a very long-term and good instrument to invest in. One can map this with any of long-term goals. Earlier you can easily calculate the future value of investment in this product since the interest rates were fixed. But these days, when interest rates are linked to the Government securities rates, so the investor has also to be vigilant enough for his investments so that this volatility should not affect his achievement of goals.
Do you have any question on PPF (Public provident fund)? you may ask in the comments section below.