In this article, we will talk in detail about PPF investment.
Public provident fund (PPF) is a popular investment scheme among investors, it is a long-term investment scheme who want to earn fixed stable returns. It is ideal for individuals with a low-risk appetite. Since this plan is mandated by the government, it is backed up with guaranteed returns to protect the financial needs of the masses in India. Further, invested funds in the PPF account are not market-linked either. Investors can also undertake PPF regime to diversify their financial and investment portfolios. At times of downswing of the business cycle, PPF accounts can provide stable returns on investment annually.
[A]. Features of a PPF account –
a) Interest rates – 7.1% per annum
b) Tax benefit – up to Rs 1.5 Lakhs under section 80C
c) Risk – Risk free, offer guaranteed returns
d) Minimum Investment amount – Rs 500 in each financial year
e) Maximum Investment amount – Rs 1,50,000 in each financial year
f) Lock-in-period – 15 Years
[B]. PPF investment criteria – A minimum of Rs. 500 and a maximum of Rs. 1.5 Lakh can be invested in a PPF account annually. This investment can be made on a lump sum or SIP basis. However, an individual is eligible for only 12 yearly instalment payments into a PPF account. Investment in a PPF account has to be made every year to ensure that the account remains active.
Note – It is advisable to invest in PPF account through lumpsum method at the starting of the financial year (probably in April or May month on or before the 5th of the month) to cover the maximum portion of interest payable to maximize your return.
[C]. PPF lock-in-period – A PPF account has a lock-in period of 15 years on investment, before which funds cannot be withdrawn completely. An investor can choose to extend this tenure by 5 years after the lock-in period is over if required.
[D]. Loan against PPF Investment – PPF provide the benefit of availing loans against the investment amount. However, the loan will only be granted if it is taken at any time from the beginning of 3rd year till the end of the 6th year from the date of activation of the account. The maximum tenure of such loans against PPF is 36 months. Only 25% or less of the total amount available in the account can be claimed for this purpose.
[E]. PPF Eligibility Criteria – Indian citizens residing in the country are eligible to open a PPF account in his/her name. Minors are also allowed to have a PPF account in their name, provided it is operated by their parents. A PPF account can be held only in the name of one individual. Opening PPF account in joint names is not allowed. Non-residential Indians (NRI) & Hindu Undivided Family (HUF) are not permitted to open a new PPF account. However, any existing account in their name remains active till the completion of tenure. These accounts cannot be extended for 5 years – a benefit available to Indian residents.
[F]. PPF Interest – The interest payable on PPF scheme is determined by the Central Government of India. It aims to provide higher interest than regular accounts maintained by various commercial banks in the country. Presently, Interest rates payable on such accounts at 7.1% and are subject to quarterly updates at the discretion of the government.
Interest rate provided by the Government of India towards the PPF scheme is Compound Interest and not simple interest. Compound interest (interest on interest) is more fruitful for the investor, as each year the principal increases, and the interest is again calculated on the increased principal (in simple interest, the principal remains the same for each successive year).
[G]. Tax Benefits on PPF – PPF is one investment vehicle that falls under the Exempt-Exempt-Exempt (EEE) category. In other words, all deposits made in the PPF are deductible under section 80C of the Income Tax Act. However, it should be noted that the maximum contribution in PPF cannot exceed Rs.1.5 lakh in one financial year.
The total interest accrued on PPF investment is also exempt from any tax calculations. The entire amount redeemed from a PPF account upon completion of maturity is not subject to taxation. It is important to note that a PPF account cannot be closed before maturity.
[H]. PPF Withdrawal – Mandatory lock-in of 15 years is imposed on the principal amount invested in such plans. In case of emergencies such as life-threatening sickness faced by the account holder or dependents, paying for higher education, child marriage, partial withdrawal can be made. However, this amount can only be extracted after the completion of 5 years of activation of the account. Up to 50% of the total balance can be withdrawn in one transaction each financial year succeeding in the 4th year.
Funds invested in a PPF account cannot be liquidated before the completion of the maturity period. Individuals looking for long-term risk-free investment options providing stable yields can easily opt for this scheme.
[I]. PPF Account Opening Procedure – Both offline and online procedures are available for an individual provided he/she meets requisite parameters mentioned in the eligibility criteria. Activating PPF online can be done by visiting the portal of a chosen bank or post office. Following documents is needed at the time of opening of a PPF account:
- KYC documents verifying the identity of an individual, such as Aadhaar, Voter ID, Driver’s License, etc
- Duly filled account opening application form
- PAN Card
- Address proof
- Form for nominee declaration
- Passport sized photograph
[J]. How to activate an inactive PPF account – In order to reactivate an inactive PPF account, you can follow the steps below:
- Submit a written letter to the bank or Post Office (PO) branch requesting to reactivate your PPF account
- Pay a minimum amount of Rs.500 for each year you have not made any contributions along with the penalty of Rs.50 per inactive year
- Bank or PO will process your request and reactivate your PPF account
- No loan or interest can be availed for the period during which the account has been inactive. The account cannot be closed for 15 years. Even if the PPF account gets inactive, the amount (including the investment and the interest) is released to the account holder or the nominee only after 15 years, i.e., on account maturity.
[K]. In a nutshell, before opening a PPF account, investors should consider the following points –
- Lengthy Tenure – 15 years is a long period, but the last contribution is made in the 16th financial year. You will not earn interest on the investment you have made on the last day of your account
- Lacks liquidity – it is not the same as mutual funds and is hereby lacking liquidity. Your money is stuck for years on end and not as easy as selling shares or units of mutual funds
- Interest on the lowest amount only – PPF rate of interest is calculated on the lowest balance between the 5th and last day of the month. For example, if you have 40,000 in your PPF account and you deposit an additional amount of 10,000 after the 5th of a month, your interest will be calculated at Rs. 40,000 (and not Rs. 50,000).
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