Public Provident Fund (PPF) : Benefits, Features, and How to Invest

Introduction

The Public Provident Fund (PPF) is one of India's most popular and trusted long-term savings schemes, backed by the government. It offers attractive returns along with tax benefits, making it a favorite among risk-averse investors. In this post, we’ll dive deep into the key features, benefits, and a step-by-step guide to investing in PPF.

What is Public Provident Fund (PPF)?

The PPF is a savings-cum-tax-saving instrument introduced by the Government of India in 1968. It’s designed to encourage small savings by offering a secure and attractive return. It’s especially beneficial for individuals looking to build a retirement corpus or create long-term wealth without exposure to market volatility.

Key Features of PPF

Understanding the features of PPF will help you make informed decisions:

Eligibility: 

Any Indian resident can open a PPF account. Non-resident Indians (NRIs) are not eligible to open a new PPF account. However, they can continue operating an existing one until maturity.

Account Tenure: 

PPF has a lock-in period of 15 years, which can be extended in blocks of 5 years upon maturity.

Minimum and Maximum Contributions: 

You can invest a minimum of ₹500 and a maximum of ₹1.5 lakh per financial year. Contributions can be made in lump sum or installments (up to 12 per year).

Interest Rate:

The PPF interest rate is set by the government quarterly. Currently, it offers a competitive rate of return (around 7.1%), compounded annually.

Tax Benefits: 

Contributions to PPF qualify for a tax deduction under Section 80C of the Income Tax Act, up to ₹1.5 lakh per annum. The interest earned and the maturity amount are also tax-free, making it an entirely tax-exempt investment.

Contributions: Eligible for deduction under Section 80C up to ₹1.5 lakh per annum.
Interest Earned: Completely tax-free.
Maturity Proceeds: The entire maturity amount, including interest, is exempt from tax.

 

Partial Withdrawals and Loans: 

You can withdraw up to 50% of the balance after the 6th year, starting from the 7th financial year. You can take a loan against your PPF balance from the 3rd to the 6th financial year. The loan amount is capped at 25% of the balance at the end of the 2nd year preceding the year in which the loan is applied for.

Benefits of Investing in PPF

Risk-Free Investment: 

As a government-backed scheme, PPF offers guaranteed returns with no risk of capital loss, making it an excellent choice for conservative investors.

Triple Tax Benefit: 

One of the biggest advantages of PPF is its EEE (Exempt-Exempt-Exempt) status, meaning that the amount invested, interest earned, and the final withdrawal at maturity are all tax-free.

Retirement Planning: 

With a 15-year lock-in period and the option to extend in blocks of 5 years, PPF helps in building a significant retirement corpus over time.

Loan Facility: 

The ability to take a loan against your PPF balance at a low interest rate (1% higher than the current PPF rate) provides liquidity without breaking the investment.

Partial Withdrawals: 

Flexibility to make partial withdrawals after the 7th year helps investors meet financial needs without entirely liquidating the account.

How to Invest in PPF: A Step-by-Step Guide

Step 1: Choose a Bank or Post Office

You can open a PPF account at any authorized bank (both public and private sector) or post office. Most banks also allow you to open a PPF account online through their internet banking portal.

Step 2: Fill Out the Application Form

Visit your nearest bank or post office or log in to your online banking portal. Fill out the PPF account opening form and provide the necessary KYC documents, including:

• Identity proof (Aadhaar card, PAN card, passport, etc.)
• Address proof
• Passport-sized photograph

Step 3: Initial Deposit

Make the initial deposit, which must be at least ₹500. You can deposit up to ₹1.5 lakh in a financial year. Payments can be made via cash, cheque, demand draft, or online transfer (in case of online banking).

Step 4: Nomination

While opening the account, nominate a beneficiary who will receive the proceeds in case of the account holder’s death.

Step 5: Track Your Contributions

Once the account is opened, you can make deposits in lump sum or multiple installments (up to 12 in a year). Ensure that your total yearly contribution does not exceed ₹1.5 lakh to avoid penalties.

Step 6: Check Interest and Account Statements

The interest on your PPF balance is compounded annually and credited at the end of the financial year. You can check your account balance and interest through passbooks (for offline accounts) or via online banking if the account is with a bank.

Step 7: Maturity and Withdrawals

Once the PPF account matures after 15 years, you can withdraw the entire amount, including interest. Alternatively, you can extend the tenure by 5 years with or without additional contributions.

PPF vs. Other Savings Instruments

Feature	PPF	Fixed Deposits	National Savings Certificates (NSC)	EPF
Risk	Government-backed	Depends on bank	Government-backed	Employer and government-backed
Interest Rate	Varies (currently 7.1%)	5-7%	Fixed (currently 7.7%)	Varies (currently 8.25%)
Tax Benefits	EEE (Exempt-Exempt-Exempt)	Depends on tenure and amount	Taxable on maturity	EEE (Exempt-Exempt-Exempt)
Withdrawal Flexibility	Limited (after 7 years)	Limited (penalty for early withdrawal)	Limited (after 5 years)	Limited (certain conditions apply)
Maturity Period	15 years	Varies (1-10 years)	5 years	Till retirement

PPF Maturity and Extension

The Public Provident Fund (PPF) has a maturity period of 15 years, after which you can either withdraw the entire balance or extend the account. Below is a detailed breakdown of the options available at maturity and how to manage your PPF account once it matures:

PPF Maturity Options

When your PPF account completes its 15-year tenure, you have three primary options:

• Withdraw the Entire Maturity Amount: You can choose to close the account and withdraw the entire balance, which includes both the contributions and the interest earned over the years. There are no penalties or taxes on this withdrawal, as PPF enjoys the EEE (Exempt-Exempt-Exempt) tax status.

• Extend the Account Without Contributions: If you do not need the funds immediately, you can extend the account in blocks of 5 years without making further contributions. The account will continue to earn interest on the existing balance during the extended period. This option is ideal if you want to keep your funds invested and growing but do not wish to add any more money to the account.

• Extend the Account With Contributions: You can also extend the account in blocks of 5 years while continuing to make annual contributions. This option allows you to take full advantage of PPF’s tax-saving benefits under Section 80C, while also letting your investments grow over an extended period. You can continue contributing up to ₹1.5 lakh per financial year during the extended period.

How to Extend Your PPF Account

If you wish to extend your PPF account upon maturity, here are the steps you need to follow:

• Submit a Form (Form H): If you want to extend your PPF account with contributions, you must submit Form H within one year of the maturity date. This form is available at the bank or post office where your account is held. If you fail to submit this form within the stipulated time, your account will automatically be extended without the ability to make further contributions.

• Extension Without Form H: If you don’t submit Form H, your account will be automatically extended for 5 years, but you will not be allowed to make any new contributions. The existing balance will continue to earn interest during this period.

Partial Withdrawals During Extension

If you extend your PPF account beyond 15 years, you gain additional flexibility with partial withdrawals:

• Withdrawals During Extended Period: You can make one withdrawal per financial year during the extended period. The amount you can withdraw is limited to 60% of the balance at the beginning of the extension period (i.e., the balance at the start of the 16th year).

• Tax-Free Withdrawals: Similar to the original PPF structure, all withdrawals made during the extended period are completely tax-free.

Maximizing Benefits During Extension

• Keep Contributing: If you’re still earning an income and want to save more for long-term goals such as retirement, it makes sense to extend your PPF account with contributions. The tax benefits under Section 80C continue during this period, helping you reduce your tax liability.

• Interest Earnings: The interest on PPF during the extended period is calculated the same way as during the initial 15-year tenure, based on the government-declared quarterly interest rate. As this interest is compounded annually, it helps your corpus grow without any tax burden.

Example of PPF Extension

Let’s assume that you have a PPF balance of ₹20 lakh at the end of the 15-year maturity period, and you extend the account by another 5 years without any further contributions. Over the next 5 years, your corpus will continue to grow with interest, even though you are not adding any more money. Assuming the PPF interest rate is 7.1%, by the end of the 5-year extension, your balance will increase significantly due to compounding.

If you need partial withdrawals, you can withdraw up to 60% of the balance available at the beginning of the extension period (in this case, 60% of ₹20 lakh = ₹12 lakh).

Additional Resources

PPF Calculator: Utilize my PPF Calculator Tool to estimate your PPF maturity amount, total deposits, and interest earned. Simply input your investment frequency, amount, duration, and interest rate to get a detailed calculation.

FAQs 

Can NRIs open a PPF account?

• No, NRIs cannot open new PPF accounts, but they can continue existing ones until maturity.

What happens if contributions are missed?

• A penalty of ₹50 is charged per year of default along with a minimum subscription amount of ₹500 for that year.

How is the PPF interest rate determined?

• The interest rate is set by the government every quarter based on prevailing market rates.

Can a joint PPF account be opened?

• No, PPF accounts cannot be held jointly. They are individual accounts.

Is premature closure of PPF allowed?

• Premature closure is allowed after 5 years for specific reasons such as higher education or medical treatment.

What happens if I don’t extend or withdraw my PPF account after maturity?

• If you neither withdraw the maturity amount nor opt for an extension, the account will continue to earn interest at the prevailing rate. However, you will not be allowed to make further contributions.

Can I extend my PPF account multiple times?

• Yes, you can extend your PPF account indefinitely in blocks of 5 years each time.

Is the interest earned during the extension period tax-free?

• Yes, the interest earned during the extension period remains tax-free.

How do I inform the bank or post office about my decision to extend the PPF account?

• You need to submit Form H to the bank or post office where your PPF account is held, within one year from the date of maturity, to extend your account with further contributions. For extension without further contributions, a written request to the bank or post office is required.

Can I change my decision after opting for extension?

• Once you have opted for an extension, you cannot change the option until the next maturity period. For example, if you opted for an extension with contributions, you must continue until the next 5-year block is completed.