All about Public Provident Fund- an investment Avenue

Public Provident Fund (PPF) has always been lucrative investment avenue for those who wish to earn stable return without any risk. However the interest rate is subject to revision every quarter, but the returns are assured because investment in PPF is not market linked. The current rate of interest is 7.1%

Salaried employees have the benefits of provident fund which are statutorily maintained by their employers. To extend the benefits of PPF to people other than salaried employees, Public Provident Fund, 1969 was framed by the central government.

PPF account can be opened with nationalised banks or post offices. Even private banks are now opening the PPF account

Who can open PPF Account and how much is the contribution amount:

Individuals are allowed to open their accounts under PPF scheme. NRI, HUF, AOP, BOI are prohibited to operate PPF account. In a financial year, the minimum contribution to the PPF Account is Rs. 500 and maximum contribution can be made to the tune of Rs. 1,50,000. The number of instalments in a FY cannot exceed 12. However the number of instalments in a month can exceed more than one. Contribution in excess of 1.5 lakh will not earn interest. If the contribution in one FY is below Rs, 500, the account will become dormant and which can be made active again by paying Rs. 50.

Maturity period:

The PPF account matures in 15 years. The account can be continued for a further block of 5 years and can be continued for number of blocks of 5 years. The account holder can make premature withdrawal after 5 years in extreme circumstances like medical treatment, higher education of children etc.

Loans available:

A loan can be taken to the maximum of 25% of the balance to the credit at the end of second preceding FY in or after the third year of opening the account. The loan is repayable in 3 years. Loan cannot be taken after 6^th FY as the withdrawal facility is available after 6^th year. The rate of interest will be 1% higher than the prevailing rate. It is not advisable to obtain loan against PPF as you will lose tax free interest on PPF.

Example: Mr. X opened the account in FY 2020-21.

Maturity of the account: The account will mature at the end of 2035-36 (2021+15)

Loan applicability: The loan can be availed to the maximum of 25% of the balance to the credit at the end of second preceding FY in or after the third year of opening the account.

Here in this case, add 2 years to 2020-21 that comes to FY 2022-23 and the second preceding FY to 2022-23 is FY 2020-21. So loan can be availed to the maximum of 25% of credit balance as on 31^st March, 2021.

Withdrawal Facility:

Withdrawal facility is available after the end of 6^th year. The account holder can withdraw 50% of the balance lying to his credit at the end of the 4^th or 1^st previous financial year whichever is lower.

Example: Mr. X opened the account in FY 2020-21.

Withdrawal applicability: 1^st withdrawal can be done after the end of 6 years I.e. 2026-27. 4 previous financial year to FY 2026-27 is 2022-23 and the 1^st previous financial year to 2026-27 is 2025-26. So the withdrawal amount will be 50% of the balance as on 31^st March, 2023 or 31st March, 2026 whichever is lower.

Tax benefits:

• Contribution to PPF is available for deduction u/s 80C to the maximum of Rs. 1.50 lakh;
• Interest earned is also exempt
• Maturity amount is also tax free

Conclusion:

PPF has, no doubt, been an attractive option looking to the tax benefits and its compounding effect due to long tenure. It is not advisable to make premature withdrawals.