Since multiple decades,?
However, despite its acclamation clearly indicative from its immense popularity amongst investors, many existing and potential PPF investors might still not be aware of all the facets pertaining to it.
Let us first understand what PPF and then have? a deeper look at its features and how it works:? ?
Introduced in 1968 and later on revised in the year 2019 by the National Savings Institute of the Ministry of Finance under the Central Government, Public Provident Fund (PPF) is an investment cum tax saving scheme aimed to promote small saving schemes in India. It is preferred as one of the safest savings schemes in India, with both its principal and interest being fully backed by the Government of India through sovereign guarantee. Since PPF primarily focuses on the aim to encourage small savers to invest for their long-term financial goals and simultaneously claim tax-deduction in the process, it remains one of the most popular and trusted instruments amongst many investors since decades, for fulfilling the twin benefits of tax saving and wealth creation.?
Thus, PPF suits risk-averse investors who prefer capital protection over growth. With the presence of key benefits in the form of completely tax-free returns coupled with the backing of sovereign guarantee from the government, PPF has been able serve as a safe investment cum tax saving instrument especially for risk averse investors aiming to save for the long term.?
How to open a PPF account
PPF account in our country can be opened by any Indian citizen. Each citizen can only have one PPF account unless the second one is in the name of a minor such as your child. NRIs and HUFs are currently not allowed to be eligible for opening a PPF account. A PPF account can conveniently be opened online or offline with Post Office or with any bank which is authorized to provide such a facility.?
Features of PPF
1. Returns
The Finance Ministry quarterly reviews PPF interest rates along with other small saving schemes. Hence, contrary to the popular perception, the interest rates of PPF do not remain fixed throughout the entire tenure. Primarily, PPF¡¯s interest rates are set on the basis of government bond yields. Currently, PPF offers an interest rate of 7.1% p.a. compounded annually. The rates have remained unchanged since 1st April 2020. Given that both PPF¡¯s maturity proceeds as well as interest income do not attract any tax, PPF¡¯s post-tax returns tend to be one of the highest amongst various fixed-income tax-saving investments.?
2.?
Taxability of returnsReturns on PPF enjoy the Exempt-Exempt-Exempt (EEE) tax status which means that the interest earned, proceeds gathered on maturity and investments are tax exempt under Section 80C of the I-T Act. This tax-free status gives PPF an advantage over its peers like 5 year-tax saving fixed deposit from banks and post office as their interest income is taxable as per the tax slab of the depositor.
3. Tax Benefits
PPF investors must be aware of the tax benefits on their investment in order to claim the deduction and reduce their tax outgo. The investment amount of PPF qualifies for tax deduction upto Rs 1.5 lakh per financial year, under Section 80C of the Income Tax Act.??
4. Liquidity
Probably the biggest disadvantage of PPF lies in its lack of liquidity due to a long lock-in period of 15 years. However, it does allow the facilities of partial withdrawals and premature closure.?
Partial withdrawals?are allowed?only?once in a year starting?from the 7th year of subscription whereas?premature closure is permitted after 5 years?for treating life-threatening diseases of account holder, spouse, dependent children or parents or for funding higher education of account holder or his dependant children and in case of change in his residential status.?
PPF investors can also avail the facility of loan against PPF deposits from the 3rd?year to 5th?year, but the loan amount has been capped at 25% of the balance available at 2 years prior to the loan application year.? Further, a second loan against PPF can also be taken before the 6th year, only if the first loan has been fully repaid.
Loan is repayable either in one lumpsum or in instalments. Principal needs to be repaid within a period of 3 years from the first day of the month following the month in which the loan is sanctioned. After the repayment of the principal amount of the loan, the interest has to be paid in not more than 2 monthly instalments at a rate of 2% p.a. Of the principal amount, The interest on the outstanding loan amount shall be charged at 6% p.a. in case of failure to repay the loan amount in full or in parts within 3 years.
5. Risk
PPF stands amongst the safest tax-saving investment options available for investors. Managed by the Government of India, both?the principal and the interest components come with sovereign-backed guarantee.?
6. Compulsory minimum annual investment
Subscribing to PPF requires a minimum investment of just Rs 500 per year during the entire tenure subscribed for. Failure to deposit this amount can attract a penalty of Rs 50 per year, besides having to clear the arrear annual subscription money of Rs 500 for each default year.?
Upon the maturity of the lock-in period of 15 years, you get the choice to either close the account and withdraw the amount or extend the maturity period in blocks of five years , either with or without making new deposits in the account. In case you choose to continue your PPF account without making any fresh investment in it, then you need not inform the branch or post office or bank for such extensions , since it will automatically be considered as account getting extended. But remember that no fresh deposits would be allowed post that. For the subsequent 5 years, the PPF balance would continue to earn the applicable interest.
However, in case you choose to extend your PPF account with fresh deposits, you need to intimate the bank or post office within 1 year of maturity date.
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