Consistent returns.

Low investment options.

Risk-free.

These are a few elements that first-time earners and retired personnel look for. The solution given by the market—Public Provident Fund.

A public provident fund is a favorite instrument among investors. But are they the best investment? Let’s dive into the basics so that you can take a call!

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ELIGIBILITY

An Indian resident of any age can open a PPF account in any major bank or post office. However, you cannot open more than one PPF account. One can also open an account on behalf of minors or dependents.

While Non-Resident Individuals (NRIs) are not allowed to open a new account, they are eligible to continue their existing account up to 15 years of maturity.

A senior citizen cannot open an account on behalf of their grandchildren. Nonetheless, they can be appointed as their legal guardians if the parents die.

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CONTRIBUTION AMOUNT

An account holder can make deposits in multiples of ₹50, with a minimum of ₹500 any number of times in a financial year, with a cap on the maximum amount, which is revised periodically. Currently, as per the Income Tax Act, the cumulative amount invested should not be more than ₹1,50,000. The PPF account is declared inactive if the investment amount falls below the minimum amount. Penalties of a nominal amount are charged for inactivity. Nevertheless, the PPF balance will continue to earn interest. 

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TAXATION CRITERIA

The well-known feature of a PPF is the triple E (Exempt-Exempt-Exempt) tax status. This means the investment, the interest, and the maturity proceeds are fully exempted from taxation as per law.

MATURITY PERIOD

The PPF account has a lock-in period of 15 years. When a holder wants to make a withdrawal in case of emergencies, he can do so under certain circumstances. The amount for maturity is calculated from the end of the financial year when the amount was first deposited and not from the date of opening the account.

Example: The first contribution was made on 1st September 2017 - this means the 15-year maturity period will be calculated from the end of that financial year, which is from 31st March 2018.

EXTENSION OF PPF A/C

After the lock-in period is over, the account holder has an option of withdrawing money, followed by the closure and extension for another tenure in blocks of 5 years.

INTEREST RATE AND CALCULATION

PPF is a fixed-income asset class, with an interest rate set by the government and revised every 3 months. Presently, interest rates are on a downward trend at 7.1%.

In PPFs, interest is calculated on calendar months and credited to the account at the end of each year.

WITHDRAWALS

Withdrawals are permissible after 5 years of the initial subscription, but not more than 50% of the total amount. Only one withdrawal is permissible during a year.

In the case of a 15-year maturity account, withdrawal for extended PPF A/c is different. Where the account is extended without a contribution then one can withdraw once in a financial year, fortunately, the withdrawal amount can be up to the balance that is available in the account. If the individual makes a fresh contribution for an extension of 5 years, he can make partial withdrawals only once a year, provided the total withdrawals during the 5 years block period do not exceed 60% of the amount.

CLOSURE OF PPF A/c

After the maturity period is over or post-extension, the account holder can close the account by making an application to the bank or post office. The request for premature closure of accounts is considered only after the expiry of 5 years on grounds such as higher education and serious illness. However, the account holder will be subject to a 1% lower interest rate as compared to what they would have received.

LOANS

A loan on PPF is only eligible against the account balance between the third and sixth financial year, capped at a maximum of 25%, with an interest rate of 1% p.a., with the entire amount payable before 36 months.

OPENING OF PPF ACCOUNT

To open a PPF account, you need-

• A savings account

• Access to interest banking login credentials

• Aadhar Number

• The mobile number linked to the Aadhar card for receiving Aadhar OTP.

The last word

A public provident fund is a long-term investment that is risk-free because the money invested is backed by the government of India. It is also a tax-free investment as the Income-tax Act provides a tax rebate (tax exemption) under section 80C.

While this is a favourite investment option, it provides safe, not high, returns. So does it suit you?

If you’ve recently started earning, it may be a good option for you to start parking a certain part of your income aside and let it stay safe. If you have a larger risk appetite, you can look at segmenting your investments into various safe as well as high-return avenues.