What is the PPF (Public Provident Fund) account, its interest rate and its tax advantages?


Since many decades, The PPF (Public Provident Fund) has remained one of the safest and most popular investment avenues in our country, especially for risk averse investors who are satisfied with moderate but guaranteed returns. Even amid the growing awareness and awareness regarding the potential of other investment options like mutual funds, PPF maintains its position of being one of the most trusted avenues of investing, primarily due to its key advantage in the form of a sovereign guarantee provided by the government on both the capital invested as well as the interest earned.

However, despite its clearly indicative acclaim for its immense popularity with investors, many existing and potential PPF investors still might not be aware of all the facets that go with it.

Let’s see what PPF is first and then take a closer look at its features and how it works:

What is the PPF?

Introduced in 1968 and then revised in 2019 by the National Savings Institute of the Ministry of Finance under the central government, the Public Provident Fund (PPF) is an investment and tax savings program aimed at promoting small investment programs. savings in India. It is preferred as one of the safest savings programs in India with its principal and interest fully guaranteed by the Indian government through a sovereign guarantee. Since the PPF primarily focuses on the goal of encouraging small savers to invest for their long-term financial goals and simultaneously claim a tax deduction in the process, it remains one of the most popular and popular instruments. most trusted among many investors for decades, to fulfill the dual benefits of tax saving and wealth creation.

Thus, the PPF is suitable for risk averse investors who prefer capital protection to growth. With the presence of key benefits in the form of fully tax-exempt returns and the support of the government’s sovereign guarantee, the PPF has been able to serve as a safe investment and tax saving instrument, especially for risk averse investors who want to save for the long term. term.

How to open a PPF account

PPF account in our country can be opened by any Indian citizen. Each citizen can only have one PPF account unless the second is in the name of a minor like your child. NRIs and HUFs are currently not allowed to open a PPF account. A PPF account can easily be opened online or offline with the post office or any bank authorized to provide such a facility.

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Characteristics of PPF

1. Returns

The finance ministry reviews interest rates on PPF and other small savings programs on a quarterly basis. Thus, contrary to popular perception, the interest rates of the PPF do not remain fixed during the entire term of office. Primarily, PPF’s interest rates are set on the basis of government bond yields. Currently, PPF offers an interest rate of 7.1% per annum compounded annually. The rates have remained unchanged since April 1, 2020. Since PPF’s maturity product as well as interest income is not subject to any tax, PPF’s after-tax returns tend to be one of the highest among the various tax-saving fixed income investments.

2. Taxability of returns

PPF returns benefit from Exempt-Exempt-Exempt (EEE) tax status, which means that interest earned, proceeds collected at maturity and investments are exempt from tax under Article 80C of the law. on IT. This tax-exempt status gives PPF an edge over its peers, such as a 5-year tax-saving fixed deposit with banks and post offices, as their interest income is taxable depending on the slab. tax of the depositor.

3. Tax advantages

PPF investors should be aware of the tax advantages on their investment in order to benefit from the deduction and reduce their tax outflow. The amount of PPF’s investment is eligible for a tax deduction of up to Rs 1.5 lakh per fiscal year, under Article 80C of the Income Tax Act.

4. Liquidity

Probably the biggest downside to the PPF is its lack of liquidity due to a long 15-year lock-up period. However, it allows the facilities of partial withdrawals and premature closure.

Partial withdrawals are only authorized once a year from the 7th year of subscription while premature closure is authorized after 5 years for the treatment of potentially fatal illnesses of the account holder, spouse, dependent children or parents or for the financing of the higher studies of the holder or his dependent children and in the event of change of his status of residence.

PPF investors can also take advantage of the loan facility against PPF deposits from 3rd to 5th year, but the loan amount has been capped at 25% of the available balance 2 years before the year of the loan application. In addition, a second loan against PPF can also be taken out before the 6th year, only if the first loan has been fully repaid.

The loan is repayable either in one go or in several installments. The principal must be repaid within 3 years from the first day of the month following that in which the loan is sanctioned. After the repayment of the principal amount of the loan, the interest must be paid in 2 monthly installments at the most at a rate of 2% pa On the principal amount, the interest on the unpaid amount of the loan will be charged at 6% pa in case of non- repayment of the loan amount in whole or in part within 3 years.

5. Risk

PPF is among the safest and most economical investment options available to investors. Managed by the Indian government, principal and interest are backed by a sovereign guarantee.

6. Mandatory minimum annual investment

Subscription to the PPF requires a minimum investment of only Rs 500 per year for the duration of the subscription. Failure to pay this amount may result in a penalty of Rs 50 per year, in addition to having to settle the annual fee arrears of Rs 500 for each year by default.

7. Easy to extend in blocks of 5 years at maturity

At the end of the 15-year blocking period, you have the choice of either closing the account and withdrawing the amount or extending the maturity period in blocks of five years, with or without making new deposits to the account. If you choose to continue your PPF account without making any new investment in it, you do not need to notify the branch, post office or bank for such extensions, as it will automatically be considered an account extension. But remember that no new deposits would be allowed after that. For the next 5 years, the PPF balance would continue to earn applicable interest.

However, if you choose to extend your PPF account with new deposits, you must notify the bank or post office within one year of the due date.

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