Understanding PPF in India

## What is Public Provident Fund?

The Public Provident Fund can be termed among the most popular long-term saving schemes within India. This scheme was brought into existence in the year 1968 by the National Savings Institute of the Ministry of Finance. Its issuance aims at the mobilization of small savings by providing an avenue of investment that yields higher returns with attractive interest rates, which is totally exempt from tax.

The PPF is one of those savings schemes that the government initiates to motivate and facilitate saving habits among its people in the long-term process, securing retirement or any other future financial need. Indeed, it works on an accrual basis as savings over a long period-in common, 15 years-during which the invested amount earns an interest rate, guaranteed and fixed by the government.

Moreover, the triple tax benefit falls in the EEE category on PPF: the amount invested enjoys a deduction under Section 80C of the Income Tax Act, the interest earned is tax-free, and the maturity amount withdrawn is exempt from tax.

The sweet niche it falls into also is because of the combination of security, tax benefit, and reasonable returns. That is just why PPF becomes an integral part of many Indians’ personal finance strategies.

## How Important is PPF?

Public Provident Fund has been very important in the financial scenario of India because of several reasons.

1. Long-term Savings Habit: PPF inculcates the habit of saving on a regular basis for so very long a period of time, which is so very important and essential for substantial wealth accumulation over a long period of time.

2. Retirement Planning: With its 15-year lock-in period and an option to extend in blocks of 5 years, PPF thus happens to be an excellent tool for retirement planning.

3. Risk-Free Investment: With a Government of India-backed investment scheme, PPF is a thoroughly secure investment and hence the best for conservative or risk-averse investors.

4. Tax Benefits: The EEE tax status of the PPF account makes a PPF account one of the most effective taxable investment options available in India.

5. Forced Savings: The stipulated annual deposition of at least ₹ 500 prevents the account holders from spending their money in one go and hence ensures the continuity in saving one’s income.

6. Social Security: The PPF acts as a source of social security in cases where persons employed in unorganized sectors or self-employed professionals fall outside the ambit of formal pension schemes.

7. Loan Facility: The balance in the PPF account can be availed as a loan by the subscribers after three years from the end of the financial year, thus providing a form of interim financing.

8. Hedge against Inflation: The interest rates on PPF are not linked to inflation; however, these rates are changed periodically and, more often than not, this has kept pace or moved ahead of the rate of inflation.

9. Wealth Creation: The compounding in PPF creates substantial wealth in the long run and is all the more rewarding for those who start off early.

10. Financial Inclusion: PPF subscription can be done by the maximum number of people; thus, financial inclusion cuts across several socio-economic strata of society.

Features of a PPF Account

Feature	Details
Account Tenure	Minimum maturity period is 15 years, extendable in blocks of 5 years.
Interest Rate	7.1% per annum for 2023, as prescribed by the government quarterly.
Investment Limit	Minimum: ₹ 500 annually; Maximum: ₹ 1,50,000 per financial year.
Flexibility of Contribution	Can be paid in a single amount or in up to 12 installments per year.
Partial Withdrawal	Available from the 7th financial year onwards.
Loan Facility	Loans can be availed from the 3rd to the 6th financial year.
Nomination Facility	Nomination facilities are available for PPF account holders.
Account for Minors	A guardian can open a PPF account on behalf of a minor.
Multiple Accounts	One person can only hold one account, except for minors under their care.
Interest Calculation	Calculated on the minimum balance between the 5th and last day of each month.
Tax Benefits	All subscriptions, interest, and maturity amounts are fully tax-free.
Transfer Facility	PPF accounts can be transferred between post offices or banks.

To understand how best to use a PPF account, the main features one needs to be aware of are as under:

1. Account Tenure: Minimum maturity period is for 15 years, extendable in blocks of 5 years for any period.

2. Interest Rate: Interest rate, prescribed by the government in a quarter to be 7.1% annum for the year 2023.

3. Investment Limit: Minimum investment: ₹ 500 annually; Maximum investment: ₹ 1,50,000 in a financial year.

4. Flexibility of Contribution: Deposit payment in a single amount or maximum 12 installments in a year can be made.

5. Partial Withdrawal: Partial withdrawal facility can be availed from the 7th financial year onwards.

6. Loan Facility: Loans are available from the 3rd financial year to the 6th financial year.

7. Nomination Facility: Subscription holders are entitled to nomination facilities in the PPF account.

8. Account for Minors: In the case of a minor, a guardian can open a PPF account.

9. Multiple Accounts: No person, except in the case of a minor on his behalf, shall have more than one account under this scheme.

10. Interest Calculation: The interest shall be calculated on the minimum balance between the 5th day and last day of each month.

11. Tax Benefits: All subscriptions, interest, and maturity amount are fully tax-free.

12. Transfer Facility: Facility is provided for the transfer of a PPF account from one post office or bank to another.

## Benefits in Investing at Public Provident Fund (PPF)

There are many benefits to investment in PPF:

1. Tax Savings: The contributions made up to ₹ 1,50,000 per year are tax-deductible under Sec 80C of the Income Tax Act.

2. Tax-Free Returns: The interest accrued and the amount of maturity is absolutely tax-free.

3. High Security: Backed by the government, PPF features as one of the most secure modes of investment available within the country.

4. Competitive Interest Rates: Ordinarily, PPF offers the best interest rates when compared with regular savings accounts and some fixed deposits.

5. Power of Compounding: Long-term PPF allows an investor to lock in the benefits accruing from the power of compounding.

6. Partial Withdrawal Facility: Facilities available for partial withdrawal from the 7th year onwards provide liquidity when needed.

7. Loan Facility: Facility for availing of loan against the balance in the PPF account provides financial flexibility.

8. Retirement Planning: Long-term and tax benefits involved make PPF an excellent tool for retirement planning.

9. Wealth Creation: Substantial wealth would be created on account of long-term regular investment in the PPF.

10. Protection from Creditors: The balance standing to the credit in a PPF account cannot be attached under court decree orders.

## Eligibility for Opening of PPF Account

The eligibility criterion for the opening of the PPF account is fairly simple to understand, and that is as follows:

1. Citizenship: Amongst the residents, only Indian citizens can open the PPF account. NRIs are not allowed to open any PPF account.

2. Age Limit: There is no age limit for the opening of the PPF account. In the case of a minor also, PPF accounts can be opened in their names by their guardians.

3. No. of Accounts: A person can open only one account in his or her name. The second account on the behalf of a minor can be opened by the same guardian.

4. Joint Account: Accounts in PPF can’t be opened jointly. They can be opened singly only.

5. Hindu Undivided Family : In the case of HUF also, PPF accounts can’t be opened.

6. Documentation: It requires proof of identity and address as the Aadhaar card, PAN card, driving license, or passport.

## Opening a PPF Account

Opening a PPF account is relatively simple, and one can do this from any of the aforementioned banks or post offices.

1. Selection of Bank or Post Office: The first step involves selecting a bank or post office where one intends to open the PPF account. Almost all nationalized banks and a good number of private banks offer this service.

2. Collect the Application Form: First, collect the PPF opening form from the selected bank or post office. Many have online forms that one can download and fill.

3. Filling the Application Form: Fill in the application form with all your correct personal details, including your name, address, date of birth, and nominees’ names.

4. Arranging Documents: Keep all the documents ready, including proof of identity, proof of address, passport-size photographs, and PAN or Form 60 in case PAN is not available.

5. Initial Deposit: The initial deposit-at least ₹500– shall be made either in cash, by cheque, or online transfer.

6. Submission of Application: The properly filled-in form along with required documents and initial deposit is to be submitted to the bank or post office.

7. Verification: Verification of your documents will be done, and your application will be processed by the bank or post office.

8. Account Activated: Once approved, it is considered that your account gets activated when you are provided with details of your PPF account along with the passbook.

9. Online Access: If you have opened an account in a bank, you may even get online access to operate the PPF account.

10. Set Up Standing Instructions: You can even consider setting up standing instructions for contributions to have controlled and regular savings.

Advanced Topics in Public Provident Fund (PPF)

## Tenure and Extension

The Public Provident Fund was supposed to be a long-term savings tool. Hence, it had a stipulated tenure of 15 years in the beginning. However, account holders are allowed to extend the same period owing to flexibility in the PPF account. Therefore, this will cover greater financial goals and retirement plans.

### Initial Tenure

1. Lock-in Period: A PPF account is for the first maturity period, which starts 15 years from the closure of the financial year in which it was opened.

2. Compulsory Contributions: The account holder has to deposit at least a minimum subscription in each financial year during this period (of ₹ 500) to keep it in an operative state.

3. Accumulation of Interest: The interest is credited annually, and over this tenure, the effect of compounding leads to significant growth in the sum invested.

### Extension Options

1. 5-Year Blocks: After a minimum / base period of 15 years, the account would be extendable for blocks of 5 years periods.

2. Extension With Contributions:

– Account holders can choose extension of the account with further contributions.

– The extended account continues like the initial period with all its features.

3. Extension Without Contributions:

  – One can extend his account without paying any more contributions.

  – The balance in the account will continue to draw interest.

  – One withdrawal is permissible in a financial year.

Extension Process

1. Time Limit: A request for an extension should be made within one year from the maturity of the initial 15-year period and each successive block of 5 years thereafter.

2. Application: A simple application to the bank or post office in which the account is held with the expression of desire for an extension will suffice.

3. Declaration: One can express the intention to continue with or without making further contributions thereafter.

Strategic Considerations

1. Retirement Planning: The extension of the PPF account provides a fine way of long-term retirement planning, especially in case the account is opened rather late in life.

2. Tax Benefits: Continued extensions with contributions mean continuous tax deductions under Sec 80C.

3. Wealth Accumulation: The power of compounding with extensions assumes greater magnitude and can result in substantial wealth accumulation.

## Withdrawal of PPF Amount

Though PPF is essentially a long-term deposit, it allows certain facilities of withdrawals to make the deposit liquid at the right time. Withdrawal rules need to be understood as a means for effective financial planning.

### Partial Withdrawals

1. Eligibility: The partial withdrawal from account is allowed from 7th financial year onwards.

2. Limit: Maximum that can be withdrawn is lower of 50% of balance at the end of the 4th year preceding the year in which the withdrawal is sought or at the end of the immediate preceding year.

3. Frequency: Only one partial withdrawal is permissible in any one financial year.

4. Purpose: There are no restrictions as to the purpose of withdrawal.

### Premature Closure

1. General Rule: No facility for the premature closure of a PPF account shall be available before the completion of 15 years.

2. Exceptions: In the rarest case of extreme necessity, the facility of premature closure may be considered and allowed in cases like:

                 Medical treatment for life-threatening diseases of self or spouse or dependent children

                 Higher education of the account holder or dependent children

 Change in the residential status of the account holder, if any.

3. Penalty: Pre-mature closure, if allowed, generally carries a penalty that includes a loss of interest.

Loan Against PPF

1. Eligibility: Loans can be taken from 3rd financial year to 6th financial year.

2. Limit: The loan amount must not exceed 25% of the balance at the end of the 2nd year before the year of application.

3. Interest Rate: It carries an interest rate 1% above the prevailing PPF interest rate.

4. Repayment: The loan is to be returned within 36 months.

### Maturity Withdrawal

1. Full Withdrawal: The entire amount (principal + interest) is Returnable tax-free at the end of the 15-year tenure.

2. Partial Withdrawal: Account holders can also opt to withdraw only a part of the maturity amount and extend the account.

### Withdrawal Process

1. Application: The subscriber has to submit the withdrawal application form at concerned bank/ post office where the account is held.

2. Verification: Verification of eligibility and execution of withdrawal will be done by the bank or post office.

3. Mode of Payment: Generally, the withdrawals are credited to the linked bank account or issued as a demand draft.

How to Transfer a PPF Account?

The transfer of a PPF account is necessitated either by relocation or on account of convenience. While not exactly complicated, it does require a certain level of attention to detail.

### Reasons for Transfer

1. Relocation: Shifting to another city or locality.

2. Convenience: More accessibility or better service at another bank or post office.

3. Consolidation: Transferring the account to where other financial relationships exist.

Transfer Process

1. Identify New Location: Identify the new bank branch or post office with which you want to get your account transferred.

2. Obtain Transfer Form:

                 Collect the PPF account transfer form from the bank/post office where the account is presently maintained.

                 Certain institutions may make this form also available online.

3. Fill Transfer Application:

                 Fill up the transfer application form with correct details.

-Provide details of the new bank/ post office where you want to get the account transferred.

4. Documents Submission:

   -The transfer form is to be submitted at the current branch holding your PPF account, duly filled.

   -Attach a copy of the PPF passbook and identity proof.

5. Acknowledgment: Get an acknowledgment for your transfer request.

6. Account Closure: The present branch shall close the account and transfer documents are handed over to your good self.

7. Opening at New Writing:

                 Now, you are required to visit the new branch/post office along with the transfer documents.

                 Complete all the opening formalities of an account at the new location.

8. Confirmation: The branch to which you have transferred the checks on the documents and opens your transferred PPF account.

Points to Note

1. No Loss of Tenure: The action of transfer does not affect the actual opening date and hence the tenure of your PPF account.

2. No Interest Loss: You don’t lose any interest in the transfer process.

3. Minimum Balance: Ensure that there will be minimum balance maintenance during and after transfer.

4. Online Transfer: Take the cake by making online transfers to them, making your job all the easier.

## How to Reactivate an Inactive PPP Account?

It gets deactivated if the accounts are not served; thereafter, the privileges attached to it can be lost. Knowing how it may be re-activated is the way to maintain those privileges associated with the account.

Reason for Inactivity

1. Missed Contributions: Not depositing at least ₹500 every year.

2. Oversight: Forgetting to contribute to it through the years due to inadvertence.

Consequences of Inactivity

1. Interest Not Applicable: The balance amount in such accounts does not bear interest.

2. Penalty: A penalty of ₹ 50 is charged per year for each year of dormancy.

3. Loss of Tax Exemptions: Not eligible for tax exemptions for those years in which the account was inoperative.

Reactivation Process

1. Visit the Branch: Visit the bank or post office where the PPF account is maintained.

2. Submission of Reactivation

– A duly filled re-activation form or in writing.

– Inactive account reason.

3. Penalties to be Paid:

  – Pay off all penalties for the said years of a non-contributory account.

– It can generally be given in cash or by a cheque.

4. Minimum Deposit Required:

– Deposits: A minimum deposit of ₹ 500 to be made for the current financial year.

   – For each year during which the account was inoperative, the account holder should, as a matter of fact deposit ₹ 500.

5. KYC: Update KYC .

6. Confirmation Required: Get confirmation in writing with regard to reactivation of the account.

Points to Note After Reactivation

1. Resumption of Interest: Interest would begin to accrue from the date of reactivation.

2. Catch-up Contributions: Contribute more to make up for the lost investment.

3. Setup Auto-Debit: So that such inactivity does not recur, set up an auto-debit for meeting the minimum contributory requirement every year.

Limitations of PPF

While PPF is one of the most common and useful saving schemes, there are some limitations, too, with which the depositor needs to be aware:

1. Limited Liquidity:

• Impossible to withdraw first 6 years.

• Even after that, it is restricted.

2. Investment Cap:

• ₹1,50,000 investment in a year.

This could be a bit lesser than what the high-income earners need to save in order to get maximum benefits of tax deductions.

3. One Account Rule: An individual can maintain a single PPF account; otherwise, accounts in the name of minors are not taken into consideration. This negates the chances of investing over and above the ceiling limit every year.

4. Fixed Rate of Interest: Generally competitive, Government-mandated rates may not always keep pace with the inflationary trends. The rates bear a tendency to get revised every quarter thus being mostly volatile.

5. Long Lock-in Period:

 The lock-in period of 15 years could easily surpass the requirement of the goal for which the investment was made initially.

 Options for premature withdrawal are hardly available.

6. Restricted to Domiciles:

NRIs cannot open new PPF accounts.

Operating of PPF account by those who become NRI while operating account is allowed only till maturity without extension.

7. No Joint Accounts:

Also, the PPF accounts cannot be held jointly thus keeping the family away from collective financial planning.

8. Contribution rigidity:

The minimum contribution of ₹ 500 every year is to be paid so as to keep the account active.

The failure to contribute exercises the penalty of inactivity in the account.

10. Tax Law Changes:

-Where the account is tax-efficient today, future changes in the tax laws may inspire friendliness to such an account no longer enjoying the EEE status.

11. Loan Restrictions:

    -Loans can be availed of only between the 3rd and 6th year.

    The quantum of loan that may be availed is limited to 25% of the balance two years previously.

12. Ladder Complexity:

-It is annoyingly long-drawn for many when the account extends beyond 15 years.

-It requires active management and decision-making at maturity.

This will help in assessing how much money to invest in PPF and to what extent it shall be included in the overall financial game plan. In effect, while there are merits of PPF which cannot be denied, it is generally found best when balanced with other investment avenues so far as diversification that suits financial goals and risk tolerance of the individual in question.