PPF: First among Tax Saving Options

PPF which stands for Public Provident Fund is an investment and Tax Saving scheme that comes with so many features that it is difficult to ignore. PPF is undoubtedly first among all other Tax Saving schemes and also qualifies as an excellent long term investment . In my opinion even if one is not in need of tax benifits, he should take recourse to this scheme as an excellent taxfree long term investment with assured returns

What Is PPF?

PPF is a small saving scheme operated by Government of India. I comes with unique features that makes it the foremost among all tax saving instruments and also else, it stands quite tall among other long term investments. Additionally all interest income from PPF including the maturity amount is fully exempt from Tax. Deposits made towards PPF accounts can be claimed as tax deductions. This makes PPF Scheme as one of the most tax efficient instruments in India. The Scheme offers an investment avenue with decent returns coupled with income tax benefits. The PPF account gives competitive interest rate. Normally it is better than the bank fixed deposit.

PPF was introduced by the National Savings Institute of the Ministry of Finance in 1968 and framed under the PPF Act of 1968. The aim of the scheme is to mobilize small savings by offering an investment with reasonable returns combined with income tax benefits and also to encourage people to create a retirement corpus. The PPF deposit goes to the account of the government & the government is responsible for its safety. Hence a PPF account is considered the most secure investment. Thus technically, It is even more safer than the fixed deposit with a Bank. The PPF corpus cannot be attached against any decree of the court. This means that the PPF account can in no way be forfeited by the lender.

Salient features of the Scheme are :

ELIGIBILTY– Individuals in their own name as well as on behalf of a minor can open the account at any Branch. opening of new PPF accounts in the name of Hindu Undivided Family has been discontinued
INVESTMENT LIMITS– With effect from August,2014 a minimum of Rs.500.00 subject to a maximum of Rs. 1.50 lac per annum can be deposited. The amount can be deposited in one go or in a maximum of 12 installments per year.
DURATION – Original duration of the PPF scheme is 15 years. Thereafter, on application by the subscriber, it can be extended for 1 or more blocks of 5 years each.
RATE OF INTEREST– The PPF account gives competitive interest rate. Normally it is better than the bank fixed deposit rate. The interest earned on the PPF subscription is compounded annually & becomes due on 31^st March each year. Interest is calculated on the minimum balance between 5th day and at the end of the month. The interest rate of PPF is variable & is announced by Government and is also linked to yield of the 10-year government bond. The interest rate of PPF is a sensitive issue; hence government in general takes a bit liberal view about it. The present policy of Government is for quarterly revision of applicable interest rates on small savings schemes. The current interest rate effective for PPF investments effective from 1st October 2018 is 8.0% per annum(compounded annually). Interest is paid on 31 March every year.
LOANS AND WITHDRAWALS – Loans and withdrawals are permitted depending upon the age of the account and balances as on the specified dates.
TAX BENEFITS– Income Tax benefits are available under Sec 88 of IT Act. Interest income is totally exempt from Income Tax. Amount outstanding to the credit is fully exempted from Wealth Tax also.
NOMINATION– Nomination facility is available in the name of one or more persons. The shares of nominees may also be defined by the subscriber.
ACCOUNT OPENING/TRANSFER: The account can be opened in Banks or Post Offices. The account can be transferred to other branches/ other banks or Post Offices and vice versa upon request by the subscriber. The service is free of charges.

Major Pros of PPF

Tax-free earnings both on interest &the amount due on maturity.
Guaranteed returns as set by the government every year which tend to be better than Bank Rates.
While PPF rates are subject to change and can decline if there is rate cut, they in general remain better than Bank FD rates at any given instance.
Complete capital protection.
Facility to make partial withdrawals and loans.
Easy to open an account either in banks or post offices.
Minimum investment of Rs 500 only per year.
Option to extend tenure with or without contributions.
Suitable for risk averse and conventional investors.
Even though the Lock in period is high, there is possibility of partial withdrawals after certain time period for a percentage of the amount & the scheme cannot be termed as fully illiquid.
Amount in PPF account cannot be attached by any court decree & a High court ruling has clarified that it cannot be attached by Income Tax authorities for recovery of Tax arrears.

Major Cons of PPF

Interest rate though in line with other small saving schemes may not be able to match return from equities.
Interest rate is variable and due to this one cannot lock into a prevailing interest rate particularly when a downward trend in interest cycle may be visible.
Lock in Period is High. PPF has a Lock-in period of 15 years and the account can only be closed on maturity.
NRIs and HUFs cannot open an account.
There is a cap on amount that can be invested per year.

FAQs on PPF

What is the Rate of Interest under PPF?

The Interest rate on PPF is variable and is notified by the Central Government in official gazette from time to time and is currently notified at 8 % p.a for the 3rd quarter starting from 1^stOctober to 31^st December, 2016. For the earlier quarter i.e. 1st July 2016 to 30^th Sept 2016 , PPF Interest rate stood at 8.1%. Present Policy of Government is to announce quarterly rates of small saving schemes which also cover PPF.
Who can open a Public Provident Fund PPF account?

An individual can open a PPF account for himself/herself or on behalf of a minor of whom he/she is the guardian. An individual can open only one PPF account on his / her own behalf. Hindu Undivided Families (HUF) have been barred from opening of PPF Account. PPF account can’t be allowed to open as a joint account.
Who can open an account on behalf of a minor child?

Only parents can open the account on behalf of a minor child. If both parents are not alive or incapable of doing so due to some reason, then a person entitled under the law is eligible to open an account on behalf of a minor child
How many PPF Accounts can one open?

Each Individual can only open one account. However he can additionally be guardian in accounts of other minors. However the maximum limit that he can invest in PPF accounts shall be the combined limit of his own account and the account where you are a guardian. This limit does not apply to HUF and spouse.
Can HUF open or continue PPF Account?

HUF are not allowed to open new PPF accounts effective from 13th May, 2005. However for accounts already opened that can continue to operate the same but no extension of 5 years is given that is PPF account cannot be rolled forward for another 5 year term after expiry of initial 15 year term.
Can NRI open or continue PPF Account?

HUF are not allowed to open new PPF accounts effective from 25th July, 2003. If a person has an existing PPF account and becomes NRI, the account cannot be continued. Similar to HUF account no extension of PPF account in case of NRI is allowed after maturity.
What is the duration of the PPF scheme?

The Duration of PPF Scheme is 15 years. Thereafter, on application by the subscriber, it can be extended for 1 or more blocks of 5 years each. Extension is not permitted for NRI & HUF PPF accounts. One can withdraw total PPF balance with interest at the end of 15 years. The 15 years is calculated from the beginning of the first financial year. If PPF account is opened on Oct 2015, the calculation of 15 year period will start from 1st April 2016 and hence the PPF account shall mature on 31 March’ 2031.

If you choose to extend your account, submit the necessary documentation that is Form H, for extension before one year passes from the maturity date. Also you can either extend the PPF account by a 5 year block, as many times as you want and make fresh contributions, or you can extend the account without making any further contributions, and continue to earn interest on it every year.
Where can PPF Account be opened?

The PPF account can be opened through the designated post offices or banks. Not every bank or its branch can open a PPF account. Along with SBI, almost all nationalised scheduled banks open a PPF account. Many private banks like HDFC Bank, ICICI Bank and Axis bank also open PPF accounts. The PPF account can be transferred from one bank to another, from one branch to another branch and from the post office to bank or vice versa.
How do PPF Accounts opened at Post Office & Bank compare?

PPF Account with Bank may offer benefits like online transfer funds to PPF account from linked saving Bank Accounts (not all Banks)

It may even be possible to online set up a Standing Instruction facility & view the account online through Post office also appears to be moving in that direction.
What is the minimum/maximum amount that can be deposited in PPF Account & frequency of deposit?

A minimum yearly deposit of Rs. 500 is required to open and maintain a PPF account. A PPF account holder can deposit a maximum of Rs 1.5 lacs in his/her PPF account (including those accounts where he is the guardian) per financial year. Any amount deposited in excess of Rs 1.5 lacs in a financial year won’t earn any interest. The amount can be deposited in lump sum or in a maximum of 12 installments per year. If the minimum amount of Rs 500/- is not deposited in any financial year , a penalty of Rs 50/- is charged.
When does a PPF account mature?

A subscriber can withdraw the entire balance standing to his / her credit after the expiry of fifteen years from the end of the financial year in which the initial subscription is made.
Are partial withdrawals from PPF account allowed?

Anytime after the expiry of five years from the end of the financial year in which the initial subscription is made, the subscriber can partially withdraw but not more than fifty percent (50%) from the balance that stood to his / her credit at the end of the fourth financial year immediately preceding the year of withdrawal or at the end of the preceding financial year whichever is lower, less the loan amount (if any). Only one withdrawal is allowed per financial year. For example, an account opened in Feb 2009 will be eligible for partial withdrawal from April 1, 2014. For a partial withdrawal requested in April 2014, the amount of withdrawal will be limited to 50% of the lower of the balances standing to his / her credit as on March 31, 2011 ( 3 years earlier closing balance) or on March 31, 2014 (present Balance). Partial Withdrawal are also allowed from a Minor’s Account, but this requires the guardian to furnish a certificate that amount withdrawn is required for the use of minor by the guardian & minor is still alive.
Is withdrawal permitted in the event if the PPF Account has been extended for a term of 5 years ( i.e. during the Extension Period of PPF account)?

In case one has extended the PPF account for a block of 5 years but without contribution, then one can withdraw any amount once in a year and the remaining amount will earn interest. However, if one has extended PPF account with contribution than one can withdraw only 60% of the account balance standing at the beginning of the block of 5 years.
Can Loans be availed from PPF Account?

One can take loan against PPF balance. The Loan can be taken from 3rd financial year up to 5th financial year. The rate of interest charged on loan taken by the subscriber of a PPF account on or after 01.12.2011 shall be 2% more than the prevailing interest on PPF. However, the rate of interest of 1% more than PPF interest p.a. shall continue to be charged on the loans already taken or taken up to 30.11.2013. Up to a maximum of 25% of the balance at the end of the 2nd immediately preceding year can be allowed as loan. Such withdrawals are to be repaid within 36 months.A second loan could be availed as long as you are within the 3rd and before the 6th year, and only if the first one is fully repaid. As one becomes eligible for withdrawals, no loans is permitted. Further inactive accounts or discontinued accounts are not eligible for loan.
Can a PPF account continue with deposits after maturity?

A subscriber may after maturity of his / her PPF Account, exercise an option to subscribe for a further block periods of 5 years, subject to the prescribed limits of subscription. This option has to be exercised by the subscriber before the end of the first financial year after maturity. Partial withdrawals in the block periods shall be limited to one per each financial year and are not to exceed 60% of the balance outstanding at the commencement of the block period. On completion of the first block period, a subscriber may continue to subscribe for further block periods, subject to the limits of subscription and exercise of such option should be done in the first financial year of every extended block period.
Is Nomination facility available in PPF account?

One or more nominees are permitted in a PPF account. In case the nominee is more than one person, the % share should be mentioned, else the amount shall be shared equally. Nomination is not permitted for minor accounts. The Nomination can be changed/cancelled at any point of time during the period of PPF account. If the nominee is minor then the account holder can appoint the guardian.

In the eventuality of death of account holder, PPF account will not stop to earn interest till the payment is made to the nominee or legal successor.

The nominee does not get the right of ownership. He is only authorized to collect the money on the death of the subscriber and keep it with him as a trustee for the benefit of the persons who are entitled to it under the law of succession. Such payment to nominee does not deprive the legal heirs and holders of succession certificate to receive the amount in the hands of the nominee.
Can PPF Account be Attached by order of Court or Income Tax Authorities?

The amount in PPF account is immune from attachment under a decree/order of a Court of Law. Further Under Section 9 of the Public Provident Fund Act, 1968, the amount outstanding in the petitioner’s PPF account cannot be attached for recovery of his tax dues.
Can PPF account can be closed prematurely?

Premature Closure of PPF Accounts is now Allowed after 5 Years subject to fulfilment of certain conditions and after furnishing necessary documents:
- For medical emergency – The amount in PPF account is required for treatment of a serious ailment or life threatening disease of account holder, spouse, dependent children or parents.
- For higher education – The amount in PPF account is required for higher education of account holder or minor account holder. In case of premature withdrawal 1% less interest shall be payable