PPF - Public Provident Fund

What is the Public Provident Fund (PPF) Scheme?

The Public Provident Fund (PPF) Scheme, 1968 is a tax-free savings avenue that was introduced by the Ministry of Finance (MoF) in India in the year 1968. Interest earned on deposits in the PPF account are not taxable. Deposits made towards PPF accounts can be claimed as tax deductions. This makes the PPF Scheme one of the most tax efficient instruments in India. It was launched to encourage savings among Indians in general, especially to encourage them to create a retirement corpus.

Public Provident Fund (PPF) Accounts

People can deposit funds in PPF accounts (Public Provident Fund accounts) for a fixed period of time to earn returns on their savings. The PPF of interest rate for the financial year 2015 - 2016 was 8.7%. This rate has been revised in the Union Budget 2016 for FY: 2016 - 17 to 8.1%.

Since this scheme was launched to encourage savings across income classes, minimum deposit requirements are very low and affordable. They are also tax-free accounts, easily accessible, safe (being backed by the government) and simple to understand, making them a popular investment avenue for a large majority of individuals in India.

PPF accounts can be opened at any nationalised, authorised bank and authorised branches / post offices. PPF accounts can be opened at specific private banks as well. These accounts can be opened by filling out the required forms, submitting the relevant documents and depositing the minimum pay-in at such branches/offices that have been authorised for the same.

Interest rates are set and announced by the government of India. Interest is calculated for a financial year according to the rate announced for the said year i.e. unlike bank FDs the rates are not fixed for the entire tenure of the holding. The maximum amount that can be deposited in the account is also subject to change.

The period from April 1st - March 31st i.e. a financial year is considered to be a deposit year for a PPF account. E.g. for an account opened in November 2010 - 2011, Year 1 will be April 1st 2011 - March 31st 2012.

Key Features of the PPF Scheme

The main things to note about PPF accounts are outlined below.

• Interest rates: Interest rates are announced by the central government periodically, usually annually. Interest earned is compounded yearly. (The current rate of interest on a PPF account is fixed at 8.1% p.a.)
• Tenure: 15 years; account continuance is allowed beyond maturity for 5 years at every renewal, with or without making additional deposits.
• Initial investment/deposit: Rs.100 to open the account
• Annual Deposit amount: Rs.500 - Rs.1.5 lakhs per year (can be revised as per government directive)
• Deposit frequency: A deposit has to be made every year, for 15 years, to keep the account active. Failure to make the minimum annual investment will render the account inactive.
• Deposit modes: Via cash, cheque,PO, DD, online funds transfer; as a one-time deposit or up to 12 installments.
• Withdrawals: Partial premature withdrawals can be made every year from year 7; withdrawals are subject to conditions. Complete withdrawal of funds can be made only at maturity.
• Tax advantages: Interests are tax-free and deposited amounts are tax deductible U/S 80C of the Income Tax Act. Withdrawals are exempt from wealth tax.
• Nomination: Allowed; on opening the account or after.
• Fund transfer: Funds/accounts cannot be transferred between people but can be easily transferred between bank branches or post offices for free.
• Loan facility: Loans can be availed against funds held in the PPF account from year 3 to year 6.
• Renewal: Renewal or extension of the scheme is allowed, for an extra 5 years at a time.
• Joint accounts: Not allowed.