A public provident fund is a government-managed fund used in various countries across the world. It is very similar to the 401k plans found in the United States.

Employees are supposed to dedicate a part of their income to a fund that is managed by the government, and they can withdraw those funds when they retire. In some cases, they can even be paid to the disabled and those that cannot help themselves.

What makes a public provident fund so popular?

Well, apart from being a retirement plan for those that decide to invest in it, a public provident fund also offers attractive interest rates and tax benefits.

How does a PPF account work?

A public provident fund is an investment option that offers tax benefits in many countries like India where there is an income tax deduction under section 80/c for the amount invested in the fund provided it is limited to 1,50,000 INR per annum.

Account maturity

Most PPF accounts are locked in for a period of 15 years. When the account matures, the investor has 2 options:

  • Withdraw the funds and close the account, or
  • Continue the account for a block of another 5 years.
Closure of the account

To close the account, you need to give a written application to the bank with your original passbook. Bank details for the proceeds must be mentioned, and a cancelled cheque must be attached with an address and identity proof. Once everything is approved, the proceeds will be credited into the account number provided during closure.

Keep the investment blocked for another 5 years

To choose this option, a written application must be given into the bank within one year of maturity. The account can be kept active without making further deposits because of the balance existing in the account. One can also make deposits into the accounts and avail tax benefits on those deposits.

Once the period of 5 years has lapsed, the investor has the option of withdrawing the funds or continuing for another 5 years. The account will keep earning interest as long as it is open.

Keep in mind
  • A public provident fund account cannot be used to pay off debts. Even a court cannot order an individual to pay off debts by using the funds in their PPF account.
  • Over the course of the first 15 years of the account, partial withdrawal of funds after the 7th year is possible, although this comes with certain terms and conditions.
Benefits of a Public provident fund
  1. Interest rate benefits: The interest rate of a PPF account depends highly on the overall situation of interest in the country. An average ppf account can offer anything between 7-8% interest benefit annually.
  2. Income Tax Exemption: Contributions to the PPF are exempt from tax. With the limit of a PPF being 1,50,000 INR, any amount above that cannot be exempted from tax. The interest earned on the amount of 1,50,000 is exempt from tax, and the maturity amount is also exempt from tax.
  3. Safety Benefits: A PPF is backed by the government of the country and thus, there is a certain level of security that it can offer which can be hard to find with other investment options. While some investment options can offer higher returns, a public provident fund assures comparatively lesser returns with better safety mechanisms.
  4. Compounded Benefits: A PPF account offers the opportunity to earn interest on not only the amount of funds deposited into the account but also on the interest earned over the years. This extends an opportunity for individuals to maximize on tax-free returns.
  5. Immunity from stock markets: Although the PPF is highly dependent on the interest rate situation of the country, the stock market and the economy have no direct impact on PPF accounts. A PPF account is immune to the volatility from the stock markets.
Can a person have more than 1 PPF account?

One person can have only 1 PPF account and if the same person is found to have another account, the second account will be closed automatically, and the individual will enjoy neither any tax deductions from the account nor earn any interest from that account.

Features of PPF accounts
  • What are the minimum and maximum limits of PPF accounts? A minimum of INR 500 and a maximum of INR 1,50,000 can be invested into a public provident fund every year.
  • What is the tenure of PPF accounts? The average tenure of PPF accounts is a 15 year lock-in period and can be extended by a period of 5 years with every consecutive application.
  • Loans and withdrawals on PPF accounts? You can take a loan on the 3rd and the 5th year from opening a PPF account and make partial withdrawals after the 7th year being limited to certain terms and conditions.
  • PPF accounts cannot be held in conjunction with another individual, although, nominations are allowed.
What is the age limit for PPF accounts?

There is no age limit for PPF accounts. Although, any individual that wishes to open a PPF account must be an adult and if not, the account must be operated by a parent/guardian on their behalf until the individual turns 18.

What are the new rules that will govern PPF accounts?
  • According to the new rules set out for PPF accounts, the account holder can make any number of deposits every financial year into the account with the minimum amount being INR 50. Previously, the number of deposits per year was limited to 12.
  • The government previously offered premature closure of PPF accounts only on the basis of two solid reasons – 1. to treat a life-threatening disease suffered by the account holder or dependent children/parents or spouse upon production of supporting documents. 2. higher education of the account holder or dependent children upon submission of the supporting documents.
  • The interest rate charged on taking loans based on PPF accounts are also reduced from 2% to 1% to be taken on top of the interest rate enjoyed by the account holder.
  • The Department of Post, through a notification, allows Post office savings cheques of any amount to be deposited into your PPF account as opposed to the limit of INR 25,000 that was in effect before.
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