The Public Provident Fund, or PPF, is a government backed small-saving scheme. Though started in 1968 with the objective of providing social security during retirement to workers in the unorganized sector and for self-employed individuals, it has become a very popular tax-saving instrument.
- The assured return.
The investor is assured a fixed return every year, though the exact figure varies. Earlier, the returns would be set every year. Now, to keep it more market aligned, it is reset every quarter according to the yield on government securities.
Between 1986 and 2000, the return was 12% per annum. It kept dropping to touch 9% by February 2003. After that it fluctuated from a high of 8.8% to a low of 7.1%. This is the rate for the current quarter of April 1 - June 30, 2020.
- The minimum investment.
Initially, to keep the PPF account active, you needed to deposit a minimum of Rs 500 every single financial year. And, a maximum of 12 deposits were permitted over that time period.
Now, an account holder can make deposits in multiples of Rs 50, any number of times in a financial year.
- The maximum investment.
The maximum amount that you can invest in any financial year is Rs 1.50 lakh. Whether you are investing only for yourself, or on behalf of a minor for whom you are the guardian, this limit holds.
- The period of investment.
The investments in the PPF account must take place over the financial year, April 1 to March 31. Not the calendar year.
If you fail to make a deposit over the financial year, then the account is suspended. To revive it, you will be charged a fee of Rs 50 and arrears of minimum Rs 500 per year of default.
Due the current lockdown in the country, the date for this year has been extended till June 30, 2020. Do note, the financial year stays constant and it is that date that is taken into account for the purpose of calculation of the interest rate.
So if you have not yet made your PPF contribution, you do have time. If you are depositing right now for the last financial year, do declare it when filing your returns. If you are doing it for the current financial year, then you can claim it in next year’s return.
- The calculation of return.
Interest is calculated for a calendar month on the lowest balance at the credit of an account between the close of the fifth day and the end of the month.
However, interest is credited to the account at the end of each financial year.
So the interest rate is reset every quarter, as mentioned above.
- The tax break.
Investments in PPF are entitled to a tax exemption up to Rs 1,50,000 under Section 80C. What’s more, even the interest earned is tax free. The interest is added to the principal investment and compounded, and the accumulated amount is also exempt from tax on maturity. This makes it an EEE investment; which is an acronym for Exempt, Exempt, Exempt.
- The tenure.
Theoretically, the PPF comes with a lock-in period of 15 years. Technically, it is 16 years. The maturity date is not calculated from the date of the opening of account. Instead, the date of calculation of maturity is taken from the end of the financial year in which the deposit was made, irrespective of the month or date in which the account was opened.
Let's say you made your first contribution on August 26, 2013. The lock-in period of 15 years will be calculated from the March 31, 2014, and the year of maturity will be April 1, 2029. Even if you make your first contribution on March 1, 2014, the lock-in period of 15 years will be calculated from March 31, 2014, and the year of maturity will be April 1, 2029.
