All your questions on PPF answered

By Larissa Fernand |  18-01-21 | 

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.

Is the return guaranteed? YES. 

You are promised a fixed return, though the exact figure fluctuates. The rates are fixed every quarter; as of now, it is 7.1% (January 1 – March 31, 2021). It is not an ad-hoc quarterly adjustment but benchmarked against the 10-year government bond yield. This periodic exercise is to keep it aligned with the current interest rate scenario. 

Is the interest compounded? YES.        

  • Interest is compounded annually
  • Interest is calculated on a monthly basis, the minimum balance in the account between the 5th and the end of the month is considered
  • Interest is credited to the account on March 31 every year

Is there a tax benefit? YES. 

It is a completely tax-free investment in every sense:

  • The principal amount invested is eligible for a deduction under Section 80C of the Income Tax Act
  • The interest earned is not taxable
  • On maturity, the accumulated amount is not taxable 

Can I have more than one account? NO. 

An individual can only have one account. Neither can you have a joint account, but you can nominate another individual. You can open an account in the name of a minor child of whom you are the parent/guardian. However, that account will be in the child’s name and you will be named as the guardian.

Can me and my spouse both open accounts for our child? NO.

Only one spouse can open an account in the name of their child, so each child can have only one PPF account.

Let’s say you have a child, Ravi. Either you be the guardian for Ravi’s account or your spouse. But Ravi, can only have one account.

Let’s say you have two minor children, Ravi and Anjali. You can have your own account, and open an account in Ravi’s name (with you as guardian), and one in Anjali’s name (with you as guardian). Alternatively, you can be a guardian for Ravi’s account, and make your spouse a guardian for Anjali’s account. 

Is there a minimum investment limit? YES. 

The minimum that you can invest in any financial year (April 1 – March 31) is Rs 500.

Is there a maximum investment limit? YES. 

The maximum that you can invest in any financial year (April 1 – March 31) is Rs 1,50,000. You can invest this at one time, or in instalments.

But, if you are putting money into your account and into your child’s account (for which you are guardian), the total limit for both is Rs 1,50,000. So the limit of Rs 1.50 lakh is technically per individual tax payer.

Can I close the account when I choose to? NO.

It is a 15-year investment with a 16-year lock-in. The first year is not taken into consideration when looking at the maturity of the account. The end of the financial year in which the deposit was made is what matters. So, if you opened the account on July 15, 2000, the 15-year tenure will commence from the end of FY2000-01 (March 31, 2001). That means it would have matured on March 31, 2016.

Premature closure is allowed after 5 years from the end of the year in which the account was opened subject to either of the following circumstances:

  • Life-threatening disease of account holder/spouse/dependent children
  • Higher education expenses of the account holder/dependent children
  • The account holder has shifted abroad and there is a change of resident status

As a penalty, at the time of premature closure, 1% interest shall be deducted from the date of account opening.

In the case of death, can the nominee continue the account? NO. 

In the case of death of the account holder, the account shall be closed. No nominee or legal heir can continue to deposit in the account. The PPF rate of interest shall be paid till the end of the preceding month in which the account is closed.

Can I extend the maturity of the account? YES.

On maturity, the account can be extended in blocks of 5 years.

Can I access the money when the account is active? YES.

Loans can be availed between the 3rd and the 6th financial year. The rate of interest on the loan is just 1%. However, the amount taken as a loan will cease to earn a return till it is repaid, along with interest. So you lose out on the tax-exempted interest (7.1%) and pay interest (1%).

A partial withdrawal facility can be availed from the 7th financial year onwards.

Is it safe? YES. 

It is a sovereign-backed investment, which means it is issued by the national government of a country. Since the funds in PPF are backed by the central government, the investment does not get any safer than this because the government will not default in its payment. It stands for the highest safety.

Moreover, the amount in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder.

If I forget to invest in any particular year, can I rectify that? YES.

The tenure of the account is for 15 years, and a minimum of Rs 500 must be invested every single financial year. If you do not deposit this minimum amount, the account will be discontinued. To revive a discontinued account, you will have to deposit the minimum annual subscription (Rs 500) + Rs 50 as a penalty for each defaulted year.

Does the account have to be opened only with SBI? NO.

You can open an account with the post office, with nationalised banks, private banks such as Axis Bank, ICICI Bank and HDFC Bank, also check with public sector banks.

Investment Involves Risk of Loss.

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