6 Things To Know About Public Provident Fund

The Public Provident Fund or PPF is a government-backed savings scheme with tax benefits and attractive long-term interest rates. Any Indian resident can easily open a PPF account either for himself or on behalf of a minor. It has a 15-year tenure, renewable in blocks of five years thereafter.

One of the biggest benefits of PPF is that you will be able to reduce your taxable income up to Rs 1.5 lakh per year by investing in the scheme under Section 80C of the Income Tax Act. The other advantages include interest rates are a few points higher than bank rates, flexible investment amounts (a minimum of Rs. 500 and maximum of Rs.1.5 lakh), safety and the facility to part-withdraw sums or take loans after a certain time.

Here are six things you should know about before deciding whether it makes sense for you to invest in PPF.

1. Exempt, Exempt, Exempt :

   PPF accounts fall under the EEE category, which means you can claim deductions from taxable income on amounts deposited up to Rs 1.5 lakh under Section 80C, and there is no tax on interest received, or on withdrawal upon maturity. This is a big benefit since most other tax saving schemes are taxed at one or more of these three levels. The Equity Linked Saving Schemes (ELSS) used to fall under this category, but under Budget 2018-19, it was decided that returns of over Rs. 1 lakh would be subject to long term capital gains tax.   

2. Ease of opening :

   Anyone can open a PPF account online or at a bank (like State Bank of India or ICICI Bank) or post office branch after filling out a simple form and completing the KYC formalities. You can open it with a minimum of Rs. 500 and invest in multiples of fifty thereafter, up to a maximum of Rs. 1.5 lakh per year, which is deductible under Section 80C of the Income Tax Act.

3. Deposits :

   Deposits can be made in the form of cash, cheque and online funds transfer from bank accounts through NEFT. If the account is with the same bank that runs your savings account, you can even leave standing instructions to automatically transfer a certain sum each month or quarter.

4. Part-withdrawals :

   You can make part-withdrawals from your PPF account after five years excluding year of account opening (if account opened during 2010-11 the withdrawal can be taken during or after 2016-17). You can withdraw up to 50 per cent of the balance at the end of the fourth preceding year, or the balance at the end of the immediate preceding year, whichever is lower (i.e. withdrawal can be taken in 2016-17, up to 50% of balance as on 31.03.2013 or 31.03.2016 whichever is lower).

5. Loans :

   Loan can be taken after the expiry of one year from the end of the FY in which the initial subscription was made.(i.e. for a/c opened during 2010-11, loan can be taken in 2012-13).

Loan can be taken before expiry of five years from the end of the year in which the initial subscription was made. Loan can be taken up to 25% of balance to his credit at the end of the second year immediately preceding the year in which loan is applied. (i.e. if loan taken during 2012-13, 25% of balance credit on 31.03.2011). You can also take a loan after the sixth financial year, provided earlier loans, have been cleared. You will have to pay an interest rate of 1% over the PPF deposit rate on the loan.

Extension :

At the end of 15 years, you can extend it in blocks of five years at a time.

A PPF account is thus a good option for those who are risk averse and want tax benefits as well as a long-term investment option. While schemes like Equity Linked Savings Scheme (ELSS) may offer higher returns, the risk is also correspondingly higher.