PPF: Tax Benefits, Interest Rate, Withdrawal & Who Should Invest?

PPF or Public Provident Fund is one of the most popular saving schemes among Indian households. Since it’s managed by the Central Government, the money in the PPF account and the returns it generates are guaranteed.

PPF, along with other small saving schemes like the Senior Citizens Savings Scheme (SCSS), the Sukanya Samriddhi Scheme, and the National Savings Certificate (NSC), was launched by the Government to benefit small savers. With a minimum investment of only Rs 500 per financial year, PPF is a clear choice for those looking for safe and guaranteed returns.

PPF also offers the best tax benefits as it falls under the Exempt-Exempt-Exempt (EEE) category. This means that first, the money invested in PPF in a financial year gets exempted from an individual’s taxable income (Under Section 80C) for that year. Also, the interest earned on PPF deposits along with the accumulated amount doesn’t have any tax liability.

The interest rate for PPF is set and paid by the government for every quarter. PPF interest rate for the first quarter of the year 2021-22 i.e. from 1st July to 30th September 2021 has been fixed at 7.1%.

Lock-in period: PPF is a long-term investment with a lock-in period of 15 years. This means that the amount accumulated in a PPF account can be withdrawn only at maturity, which is 15 years from opening the account. This tenure can be extended by 5 years at the end of the actual lock-in period. Premature withdrawals are allowed but only in case of emergencies.

Interest on PPF: Interest on the PPF balance is calculated every month and the amount is credited to the PPF account at the end of every financial year. The interest rates are pre-announced by the Government for each quarter. Each month, the interest amount is calculated on the lowest PPF balance in the account after the 5th of every month to the last day of the month. Hence, PPF investors are advised to make contributions to their PPF account before the 5th of each month.

Minimum and maximum investment: Individuals need to make a minimum investment of Rs. 500 annually. A maximum investment of Rs. 1.5 lakh can be made in one financial year in a PPF account.

Taxation: PPF comes under the Exempt-Exempt-Exempt (EEE) category of tax policy which implies that the principal amount, the maturity amount, as well as the interest earned is exempt from taxes.

Loan against PPF: A PPF account holder can take a loan against his PPF balance.  However, the loan can be taken only between the beginning of the 3rd year and the end of the 6th year from the date of account opening. The maximum loan amount is limited to 25% of the PPF balance at the end of – the 2nd year or the year preceding the year in which the loan is being applied.

Eligibility Criteria
  • Only an Indian resident can only 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 are not allowed
Documents required to open a PPF Account

Here is a list of documents that should be procured at the time of opening a PPF account:

  1. PPF account opening form- Form A (This form can be obtained from any bank which is authorized to open a PPF account)
  2. KYC documents to verify the identity of the individual- Aadhaar Card, Voter ID card, or Driving License
  3. Proof of Address
  4. PAN Card
  5. Passport-size photograph of the individual
  6. Nomination form- Form E (This form can be obtained from any bank which is authorized to open a PPF account)

Individuals can open a PPF account at post offices or through nationalized banks and major private banks like ICICI, Axis, HDFC, etc.

Banks eligible to open PPF Account for their Customers

Indian Overseas BankAxis BankState Bank of IndiaIDBI Bank
ICICI BankBank of BarodaHDFC BankCorporation Bank
Oriental Bank of CommerceBank of IndiaAllahabad BankCentral Bank of India
Canara BankUnion Bank of IndiaIndian BankUnited Bank of India
Bank of MaharashtraPunjab National BankDena BankVijaya Bank

Please Note: The Banks are only intermediaries that help you open the PPF account, the money you deposit still goes to the Government, and not to the particular Bank.

How to Open a PPF Account Online?

If you have an account with any of the above banks, you can use their net banking service to open a PPF account:

  • Log in to your net banking portal
  • Click in the option that allows you to ‘Open a PPF Account’
  • Choose the relevant option between a ‘self account’ and a ‘minor account’
  • Enter the required information such as nominee details, bank details, etc.
  • Verify details like your Permanent Account Number (PAN), etc. that is shown on the screen
  • After verifying the details, enter the amount that you wish to deposit in your PPF account
  • You will be asked to set up standing instructions that enable the bank to deduct the amount at fixed intervals or in a lump sum
  • After you make your choice, you will receive an OTP on your registered mobile number
  • Once this verification is done, your PPF account gets opened. You are advised to save the account number that is displayed on the screen for future reference
  • Certain banks may even ask you to submit the hard copy of the details entered along with the reference number and submit it to the respective bank with your KYC details

It must be noted that each bank may have a relatively different process for opening a PPF account. The general steps to be followed, however, remain the same.

How to Check PPF Balance

Checking PPF Balance Online

If the PPF account has been opened through the net banking service of a bank, the PPF balance can be easily checked online:

  1. Before you begin, ensure that your net banking with your bank account is active
  2. Log in to your PPF account using your internet banking credentials
  3. Once you log in, your current PPF account balance will be displayed on the screen
  4. Logging in to your account using internet banking allows you to transfer funds to your account online, set up standing instructions for your PPF account, download your account statement, and submit your PPF loan application, etc.

Checking PPF Balance Offline

The bank provides a separate passbook for PPF account which comprises your account balance, account number, bank branch details, credits/debits to your account, etc. You can check your PPF account balance offline by updating this passbook.

  • The PPF passbook can be updated periodically by visiting a branch of a bank from where you opened the PPF account
  • Some banks have furnished automated passbook update machines at the banks. However, you need to visit the bank during operating hours to get your passbook updated
  • Once updated, your PPF passbook will show all the credit/debit transactions along with the outstanding balance

In case you have a PPF account opened through the Post Office, you would need to visit the same post office to update your passbook.Withdrawal of PPF Balance

PPF works under a mandatory lock-in period of 15 years. However, partial withdrawals can be made in emergency cases. Partial withdrawals from the account can be made after the completion of the 5th Financial year from the year in which the account is opened. For example, if the account was opened in Feb 2015, withdrawal can be made from the financial year 2020-21 onwards. Only one partial withdrawal is allowed per financial year. 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 year of withdrawal, or
  2. 50% of the account balance as at the end of the 4th financial year, preceding the year of withdrawal

Form C should be submitted to withdraw a partial amount from the PPF account.

  • Details such as account number, amount of money to be withdrawn, etc. are to be mentioned in the form
  • A declaration stating that no other amounts were withdrawn during the same financial year should also be submitted
  • In case, the account is in the name of the minor, an additional declaration stating that the amount is required for the use of a minor child who is still a minor and is alive
  • Passbook is also required to be submitted along with the form

Loan Against PPF

The facility to avail loan against the PPF account is available from the 3rd financial year up to the 6th financial year from the date of opening the account. A second loan can be obtained only after the closure of the first loan.

For example, if the PF account is opened on Jan 1, 2012 (FY 2011-12), the end of the financial year in which the account was opened is Mar 31, 2012. The loan can be taken from 1st April 2013 (FY 2013 – 14) onwards. Five years from the end of the financial year in which account was opened on March 31, 2018 (FY 2017 – 18). Thus, the loan can be obtained from Mar 31, 2013, to Mar 31, 2018. The maximum tenure of such a loan is 36 months.

  • Form D must be submitted to avail loan against the PPF account
  • The form requires details such as account number, the amount being borrowed, etc along with the undertaking that the amount will be repaid with interest within three years
  • The maximum amount of loan that can be availed against PPF accounts is 25% of the balance at the end of the 2nd financial year preceding the year in which the loan was applied for
  • In the above example, if the investor wants to take the loan in April 2013, the maximum loan that can be availed is 25% of the balance as on Mar 31, 2012

Interest on Loan against PPF

  • The interest rate payable on loans taken against PPF accounts is 2% higher than the prevailing interest rate. For example, if the prevailing interest rate is 8%, then interest payable on loan taken on such account would be 10%
  • Before Nov 30, 2011, this rate was 1% higher than the prevailing interest rate. Hence, in case of loans taken before the said date, the interest charged would be 1% above the prevailing rate
  • The interest is not paid with the principal amount in EMIs
  • Once the principal amount is fully repaid the interest has to be repaid within 2 months

In case the loan is not repaid within 36 months, interest at 6% more than the prevailing interest rate of PPF account is charged.PPF Nomination

Nomination can be made in favour of one or more person(s). In case, more than one person is appointed as a nominee, the percentage share of each nominee should be specified.

  1. Nominations cannot be made for the minor’s PPF account
  2. Parent, spouse, relatives, children, friends, etc. of the account holder can be nominated
  3. The account holder must submit Form E to add a nominee to the PPF account
  4. Nomination can be made at any time during the tenure of account. Change, cancellation or alteration in nomination can be done through Form F
  5. Nomination forms need to be signed by the account holder and two witnesses. Signature of the nominees is not required

After being duly filled, the form must be submitted at the appropriate bank/post office branch.Transfer of PPF

The PPF account can be transferred from the bank to the post office or vice versa. It can also be transferred between different branches of the same bank.Revival of Inactive PPF Account

The PPF Account becomes inactive if the minimum contribution of Rs 500 per year is not made. To revive an inactive PPF account,

  1. A written request to reactivate the account should be submitted at the post office or the bank branch where the account is based
  2. A fine of INR 50 for each year the account has been inactive has to be paid
  3. Arrears of a minimum amount of INR 500 for all the years the account has been inactive have to be paid

Closure of PPF Account

Premature closure of PPF accounts is not permitted within 5 years of opening the account. Thereafter it can only be closed on specific grounds such as life-threatening ailments affecting the account holder, spouse, dependent children or parents. Supporting medical documents have to be produced to support a claim on these grounds.Extension of PPF

A PPF account matures after 15 years from the end of the financial year in which the account was opened. At the time of maturity, the account holder has the option to extend the tenure in the blocks of 5 years:

Extension of PPF with Contribution

A subscriber can extend the life of the PPF account indefinitely in blocks of 5 years at a time. The subscriber has to submit a request to extend the account, with further contributions by submitting Form H.

  • The choice of extension with contribution has to be made within one year from the date of maturity, otherwise, the default choice of extension without further contribution applies
  • Once the account is extended with contributions, the maximum 60% of the balance as on the date of extension of the account can be withdrawn
  • This amount can be withdrawn in one go or can be spread over several years
  • A maximum of one withdrawal can be made in a year

Extension of PPF without further contribution

If no choice is made, then the default choice, .i.e. extension without further contribution applies.

  • You do not need to fill any form to choose this option
  • A maximum of one withdrawal is allowed per year and any amount up to the total balance in the account can be withdrawn

Once the PPF account is renewed with/without contribution, the option cannot be switched, i.e. from with contribution to without contribution or vice versa.

In case the amount is deposited in the account without choosing the correct option, no interest will be payable on such amount. Also, no deduction under the Income Tax Act will be available on such contributions.Other investment alternatives to PPF

Due to its guaranteed returns and tax benefits, PPF is preferred by many individuals, particularly small savers who have a low appetite for risk. However, there are several other savings and investment options available to those who want better returns in the long-run or more liquidity with their investments. Some of the common alternatives to PPF are ELSS, Tax-Saver FDs and NPS.

POPULAR TAX SAVING INVESTMENT SCHEMES
Name of SchemeRate Of Returns (p.a.)Tax TreatmentLock-in PeriodMinimum Investment Per Annum(Rs.)
Public Provident Fund7.1%Principal and interest amount qualifies for tax deduction under section 80C
Interest earned is tax free
15 years500
Equity Linked Saving SchemeCategory average return:
1 year: 19.67%
3 Year: 6.59%
5 Year: 13.39%
Principal amount qualifies for tax deduction under section 80C
LTCG tax @ 10% on gains above Rs 1 lakh booked in a financial year
3 years500
National Pension Scheme (All Citizen Model)1 year return:
Tier 1 Equity : 16.68-20.18%
Tier 1 Govt bond : 13.43-14.91%
Tier 1 Corporate Bond : 12.64-14.70%
3 year return:
Tier 1 Equity : 8.17-11.16%
Tier 1 Govt bond : 11.20-12.77%
Tier 1 Corporate Bond : 8.87-10.41%
5 year return:
Tier 1 Equity : 13.04-15.61%
Tier 1 Govt bond : 10.26-11.83%
Tier 1 Corporate Bond : 9.25-10.16%
Principal amount qualifies for tax deduction under section 80C and an additional deduction of Rs 50,000 under section 80CCD (1B).
Interest earned is tax free
Up to retirement500
National Saving Certificate6.8%Principal and interest both qualify for tax deduction under section 80C (except interest received in the final year )5 years1000
Tax Saver Fixed Deposit3.50-7.50%Principal amount qualifies for tax deduction under section 80C
Interest earned is taxable as per income tax slab
5 years1000 onwards, varies from bank to bank
Sukanya Samriddhi Yojana7.60%Principal amount qualifies for tax deduction under section 80C
Interest earned is tax free
21 years from date of opening of account or upon marriage of account holder, whichever is earlier250
Unit Linked Insurance Plan5 year returns (category average for different funds): 5.41-13.25%Premium paid qualifies for tax deduction under section 80C
Interest earned is tax free if the annual premium does not exceed 10% of the sum assured*
5 years1000 (Monthly Premium)
5 Year Post Office Time Deposit Account6.70%Principal amount qualifies for tax deduction under section 80C
Interest earned is taxable as per income tax slab
5 years1000

*For a policy issued after 1st April 2012, ULIP premium should not exceed 10% of the total sum assured. For a policy issued before 1st April 2012, ULIP premium should not exceed 20% of the total sum assured.

Our recommendation is that if you are not ready to take risks and only want guaranteed and safe returns, then PPF should be your choice. However, if you are willing to take the moderate risk, you should consider ELSS, as equity over the long run (5 years or more) has historically given much higher returns than PPF, despite the capital gains tax associated with it. At 3 years, ELSS also has a significantly shorter lock-in period.

Those with a low-risk appetite can also look at Tax-Saver FDs as an alternative to PPF if they want a shorter lock-in period. But, please note, interest in PPF has been traditionally higher than FDs.  Also, tax-saver FDs are best suited for only those who can make a lumpsum investment; small savers who want to deposit small amounts through the year and also, save taxes, should choose PPF.

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