Investment in PPF (Public Provident Fund) – Tax Saving Investment

Public provident fund was introduced in INDIA in 1968 to mobilize small savings in form of an investment with the benefit of guaranteed return on it. PPF has a minimum tenure of 15 years and also can be extended in blocks of 5 years as per requirement. It is a long term investment option which offers attractive rate of interest and returns on amount invested and helps to save the taxes.  It can easily be opened with a minimum balance of just Rs 100.

PPF account can be opened either with post office or with nationalized banks like State Bank Of India Punjab National Bank, etc. several other private banks are also permitted to provide such facility like ICICI , HDFC, etc. For opening such an account an application is duly required along with certain documents i.e. KYC documents like identity proof, address proof and signature proof. After submitting the above discussed documents the account holder can deposit a prescribed amount towards the opening of the account.

Who can open PPF Account?

Any person who is resident in INDIA is only allowed to open its account in public provident fund. NRIs and HUF are not allowed to open their accounts in PPF. This kind of account can be held on the name of one person only i.e.  joint account is not permitted. But a person can be nominee of the other account holder only if the other account holder is a minor.

Interest Rates on PPF

The finance ministry sets the interest rates every year for PPF investments which is paid on 31^st march of every year. Interest is calculated on the lowest balance between the close of fifth day or last day of every month. The government has cut down the interest rate for the first quarter April to June for FY 2020-21 from 7.9% to 7.1% with a change of -0.8%.

Deposits in PPF

Public provident fund allows minimum of Rs 500 and maximum of Rs 1.5 lakh for investment in a year. Investments can be made in lump sum or in installments in a year. Deposits of installments can be done through cash , cheque ,demand draft or through any online fund transfer mode. It is mandatary that deposit has to be made at least once in every 15 years.

How to make Withdrawal from PPF

For withdrawing the amount an application for withdrawal is required in FORM-C with the concerned branch in which the account is opened.

PPF amount can be withdrawn based upon the fulfillment of some conditions:

1. On Maturity: PPF account can be closed only upon its maturity which is 15 years if not extended further. At the time of maturity whole amount which is credited to account holder in PPF account with accrued interest can be withdrawn and account can be closed freely.

2. Premature / Partial PPF Withdrawal: If the account holder wishes to withdraw the amount before its maturity then he/she can withdraw partially with a limit of amount withdrawn.

Such partial withdrawal is permitted only after completion of 5 years of account opening i.e from the 6^th financial year. This kind of withdrawal is done only once in a financial year. The withdrawal is determined on the basis of the two cases which ever is lower.

1. 50% of the PPF account balance as at the end of the financial year, preceding the current year, or
2. 50% of the PPF account balance as at the end of the 4th financial year, preceding the current year.

For better understanding lets go through the table as under:

Loan against PPF.

The account holder can also take loan against its PPF investment. But this loan is allowed between 2^nd and 5^th year of opening the account. The loan amount is limited up to 25% of the second year immediately preceding the loan application year. The loan can be applied for in FORM -D.

Repayment of Loan and Interest of PPF Account

Principal Amount of Loan : The repayment of the loan has to be done within 36 months from the next month in which loan was availed. The repayment can be done in two or more installments or a lump sum amount.    

Interest Amount of Loan : The interest shall be paid at 2% p.a. of principal amount from the next month of the loan taken period till the full repayment of the principal amount.

Tax benefits of investment in PPF

PPF investment is a tax saving vehicle because all deposits made in PPF are deductible under section 80c of income tax Act, accumulated amount of investment is exempted from tax at the time of withdrawal and interest provided is also exempted from tax at the time of its withdrawal.  Hence, this is the best mode of saving tax and claiming the tax exemption.