The Public Provident Fund (PPF) is a long-term savings scheme for consumers who have low to zero risk appetite to invest in a government-backed scheme that helps them protect their investments from being taxed.
The PPF also allows consumers to earn tax-free annual interest, fixed by the Indian federal government each year, on their investment which is not market linked.
Let’s understand what makes PPFs interesting and how you can open a PPF account of your own.
What Makes PPFs Attractive?
The National Savings Institute of India (NSII) under the Department of Economic Affairs of the Ministry of Finance is mandated to manage saving schemes such as the PPF. It is the NSII that promotes and details regulations PPFs accounts have to comply with. These include:
Investment Limit
Investors can deposit a minimum of INR 500 and a maximum INR 1.5 lakh in a single financial year.
These investments, called subscriptions, can be paid into the account in one lump sum or in instalments not exceeding twelve in a year.
Interest Rate
The PPF is an all-time Indians’ favorite as these funds help them earn interest usually higher than any other government or non-government schemes and investment policies.
The current rate of interest on a PPF account is 7.1%, higher than interest earned on any other savings scheme in India.
The interest that an individual earns is the rate calculated annually on the lowest balance at credit of an account between the close of the fifth day and the end of the month and is credited to the PPF account at the end of each year.
Maturity
Subscriptions in PPFs have a lock-in period of 15 years, which means PPFs mature after this tenure. After maturity, the PPF account can be extended for any number of a block of 5 years with further deposits.
If a subscriber does not want to make further deposits but maintain the account, they can retain the account indefinitely with the prevailing rate of interest.
Tax Deduction
The deposit in a PPF account is qualified for deduction under Section 80 C of the Income Tax Act. It means no tax is deducted on deposits made in any year in a PPF account.
The interest earned on deposits in a PPF account is also completely exempted from Income Tax under Section 10 (15 of the Income Tax Act).
Withdrawal
Once the PPF account matures, subscribers are free to withdraw the entire principal and the interest earned on it.
Account holders have the facility of partial withdrawal, which permits withdrawal from the end of the fifth year starting from the first year the initial investment was made.
This partial withdrawal is permissible for an amount not exceeding 50% of the amount in the PPF account at the end of the fourth year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower.
In case of partial withdrawals, one withdrawal is permitted during any one year.
Getting a Loan
PPF account holders can get a loan one year after the end of the year in which they made their first investment and before the expiry of five years from the end of the year in which the first investment was made.
A loan not exceeding 25% of the amount that stands in the PPF account at the end of the second year immediately preceding the year in which the loan is applied for can be sought.
The loanee is not entitled to get a fresh loan until the earlier loan along with the interest has been fully repaid.
Payment of Loan Taken Via PPF Account
From the month in which the loan is sanctioned, the principal amount needs to be repaid before a 36-month expiry period. Post principal payment, the interest on the loan at the rate of 2% per annum has to be paid.
If the borrower fails to repay the principal or makes a partial payment of the principal, interest on the amount of loan outstanding is charged at 6% per annum instead of at one per cent per annum from the first day of the month following the month in which the loan was obtained to the last day of the month in which the loan is finally repaid.
Account Activity
It is mandatory for investors to deposit a minimum of INR 500 every financial year for the PPF account to remain active.
Failing to deposit a minimum sum can lead to the account being considered an inactive account.
To revive an inactive account, the subscriber has to pay a penalty of INR 50 per annum from the year of the account’s discontinuation.
The deposit in the account continues to accrue interest even as the account becomes inactive.
Nominees
Subscribers can add more than one nominee to their PPF account at the time of opening of the account. During the tenure of the account, nominees can be changed or cancelled altogether upon the will of the account holder.
Upon death of the PPF account holder, nominees are passed on the deposits and the interest earned on them without limitations of the completion of the maturity period. A nominee cannot continue the PPF account by making fresh contributions.
How Can You Open a PPF Account?
An Indian citizen can open a PPF account via the Indian Post Bank or any bank that is authorised by the Government of India.
Most government-run banks are eligible to open a PPF account. Large private banks too aid opening and maintaining a PPF account. Irrespective of what kind of bank opens the PPF account, the account is maintained by the Central government via the NSII.
Steps to Open a PPF Account
Only one account can be opened by a citizen in India and the provision of joint accounts is not available for PPFs. The subscriber can open another account in the name of minors but is subject to maximum investment limit by adding balance in all accounts.
To open a PPF account, your bank requires you to submit the following documents:
- Proof of Identity: Voter ID card, PAN card or your Aadhaar Card
- Proof of Residence: Electricity bill or water bill
- Passport size photographs
- Nomination Form: This can be procured from the bank branch or the post office
- Pay-in-slip: This can be availed at the bank branch or the post office
Open a PPF Account Offline
The easiest way to open a PPF account offline is via the Indian Post Office.
- Procure an application form for the opening of the account from the city post office or sub-post office near you.
- Fill the application form with personal details such as your name, phone number, residence.
- Submit the application form along with KYC documents and passport-sized photographs.
- Pay a minimum sum of INR 500 for the opening of the account.
- Upon submission, you will receive a passbook for your PPF account.
- The passbook will contain important details such as your PPF account number, PPF account balance, transaction done via your PPF account etc among others.
Open a PPF Account Online
The online process for opening of PPF accounts online for banks is similar to one another’s. If you want to open a PPF account with a bank of your choice, you first need to enquire if the service is available with your bank.
India’s largest private bank, HDFC Bank, details this step-by-step guide for the opening of a PPF account with them.
- You must be an HDFC Bank savings account holder.
- You must have net-banking/ mobile banking enabled for your account.
- Your ‘Aadhaar’ number should be linked to your account.
- Your mobile number which is linked to your Aadhaar should be active, to receive an OTP which is used to e-sign/ e-authorise the opening of the PPF account instantly.
The process to open a PPF account Online.
- Sign in to HDFC Bank NetBanking.
- Under Offers Tab, click on the banner for ‘Public Provident Fund.’
- Confirm the details shown in the next screen and enter the amount you want to deposit.
- Choose if you wish to add a nominee and click submit.
- If your Aadhaar is linked to your account already, your form will be submitted, and you will receive a message that your account will be opened in one working day.
- If your Aadhaar is not linked, you must first link it, to be able to complete the process.
- Once you have opened a PPF account online, you can transfer funds directly from your savings account to your PPF account.
Opening a PPF account via the Indian Post Office is not an entirely online process and you need to pay a visit physically to complete the process of submitting details required.
