PPF: What is Public Provident Fund, Features and Tax Benefits

What is a Public Provident Fund (PPF)?

The Public Provident Fund is one of India’s most sought-after long-term Investment instruments. Since 1968, this public saving scheme has been a popular platform for long-term investors who want to park their investment in a safe scheme with guaranteed returns. This investment product is availed of by investors willing to invest consistently for an extended period of time to enrich their retirement, as it offers attractive interest rates and numerous tax benefits. A guarantee of returns from a sovereign state assures the investor to put aside a portion of their hard-earned money until the maturity date. The Government of India determines interest rates every quarter, which are exempted from taxes under Section 80C of the Income Tax Act. 

Features and Benefits of the Public Provident Fund Scheme

The Public Provident Fund is a saving-cum-investment scheme aiming to provide investors with substantial returns. The scheme also aims to foster a habit of saving among the investors by offering attractive returns and tax benefits. Find below the following features of the PPF scheme: 

• The principal amount an investor needs to invest in the public provident fund scheme ranges from Rs 500 to Rs 1,50,000. The contributions to the PPF scheme can be made in either lump-sum or through installations. It is to be noted that the installation shall be made annually into the account for a time period of 12 years. The investor can also not exceed the limit of Rs 1,50,000 in a financial year.
• The Public Provident Fund has a lock period set at 15 years. The scheme also offers a provision for a 5-year extension to the investors. The amount invested in the scheme cannot be withdrawn before maturity.
• The PPF scheme also offers the provision to avail of a loan against the investment amount. However, an investor can utilise this option only between the beginning of the third and end of the sixth year from the account commencement date. Partial payment from the fund is also granted after the 7th year for emergency purposes. 

• The Central Government determines the interest rate on the Public Provident Fund scheme. The interest on the investment is set at a competitive rate to yield higher returns for the long-term investors. The current interest rate on the investment in PPFs is 7.1% which is subject to change at the government’s discretion. 
• The PPF scheme does not offer the provision to open a joint account. However, the concerned investor can nominate a beneficiary in any unforeseen circumstances. 

PPF Interest Rates

The PPF interest rates are determined by the Central Government quarterly. Generally, the interest rates on the scheme vary from 7.6% to 8%, subject to change owing to diverse external factors. The current rate of interest on the Public Provident Fund scheme is 7.1% which is compounded on an annual basis. The interest rate on the PPF is attractive and competitive compared to other long-term investment instruments. 

Find below a tabular representation of the interest rates offered on the Public Provident Fund scheme since 2018. 

Public Provident Fund Calculation with Example

Introduced by the Ministry of Finance the Public Provident Fund Scheme is a financial instrument designed to instil a saving habit among the investors. The maturity value, the sum invested and the interest earned are exempted from tax as the investment features in the EEE category. 

The Interest on the investment is compounded annually. The interest amount is computed monthly and credited at the end of the financial year. 

Find below the formulae utilised to calculate the maturity value of the PPF investment. 

A= P[{(1+i) ^n}-1/i}

where

The Maturity amount is A 

Principal amount invested in the scheme is P 

Anticipated interest rate on the scheme is I
Investment tenure is n 

Find below an example of how the compounded interest is factored in investments to get a clearer understanding of the concept with multiple investment tenures. 

Suppose you invest Rs 30,000 annually through lump sum or monthly instalments to earn the current interest rate of 7.1% per annum on your investment. 

Case 1: Investment tenure is 15 years. 

Total investment:   Rs 4,50,000 

Interest Amount:   Rs 3,63,642

Maturity Amount:  Rs  8,13,642

Case 2: Investment Tenure is extended to 20 years. 

Total Investment: Rs 6,00,000 

Interest Amount:  Rs 7,31,658 

Maturity Amount: Rs 13,31,658 

Case 3: Investment Tenure is extended to 25 years. 

Total Investment: Rs 7,50,000

Interest Amount: Rs 13,11,603

Maturity Amount: Rs 20,61,603

The abovementioned table showcases the compound effect on the investment amount. 

• An extended investment of Rs 1,50,000 for five years accentuates the maturity value by Rs 5.18 Lakhs 
• An extended investment in the scheme for another five years triggers the maturity value by 7.29 Lakhs. 

Tax Benefits of PPF Investment

The PPF investment features in the EEE, i.e. the exempt-exempt-exempt category. That means under section 80C of the Income-tax1  act 1961, no tax shall be levied on the principal, interest, and maturity amount. Under the condition that the contribution made in a financial year does not exceed Rs 1.5 Lakhs. 

If the investor wears out their investment ceiling, PPF is still an attractive investment option among the risk-averse long-term investors that aspire to avail of guaranteed returns.

The PPF scheme remains popular among investors who want to gain from the compounding effect of the investments and want to secure a tax-free and handsome maturity value.

Public Provident Fund Investment Guidelines

An individual interested in investing in the PPF scheme should adhere to the below-mentioned guidelines: 

• The investor is required to contribute at least one instalment annually for the lock-in period of 15 years. The instalment or lump sum payment can range from Rs 500 to Rs 1.5 Lakhs. The investor contribution will automatically be rejected if they try to invest more than Rs 1.5 Lakhs. The investor can contribute as per their discretion regarding the number of deposits to be made. The contributions can be made online or via cash, cheque, and demand draft.
• The scheme allows the investor to nominate more than one person. The share percentage of each nominee should be specified in case the account holder avails of this option. However, this facility is not present if the account holder is a minor.
• The investor must submit Form C to the post office or the bank where the PPF account is present by the end of the 15th year to terminate it and withdraw the maturity value. It is not a compulsion to terminate the account after the maturity date and an investor can continue their account even without making any contributions. They’re also eligible to make one withdrawal from the account annually.
  The investor can also extend their account with contributions. They have to apply for an extension of a five-year block. However, the investor is required to submit Form 15 in case they want to avail of an extension with contributions. If they fail to do so, they will not be eligible for any interest on the amount invested.
• The investor can withdraw the amount from the PPF account prematurely only after five years from the date of the first investment made. However, it is to be noted that the withdrawal cannot be partial. The investor is allowed to withdraw only 50% of the total corpus at the end of the fourth financial year.
• The investor can prematurely close their account in case of a medical emergency inflicted on the individual or their close family. They are required to submit supporting medical documents to complete the premature closing procedure. 

Loan Against Public Provident Fund Scheme

The PPF account is a secure financial instrument that provides various benefits to its investors. An investor who maintains a PPF account can avail of a loan against the investment amount on the precondition that the balance is not due for any withdrawal. 

• The provision to avail of the loan is only restricted to the period between the third and sixth financial year from the date of inception of the account. 
• The loan amount to be granted shall not exceed 25% of the Public Provident fund account balance. 
• The concerned individual need not pledge any collateral on loan. 
• The repayment tenure shall not exceed 36 months, and the interest levied is 2%. The interest rate would increase to 6% if the borrower fails to repay the principal within the abovementioned tenure. 
• The balance on the PPF does not pocket any interest until the loan is settled. It is to be noted that an individual can avail of only one loan against the PPFat at a time.  

What is Form C and its Sections?

On the maturity date of the Public Provident Fund, if the investor wishes to withdraw the entire corpus, they are required to submit Form C to the post office or the branch of the bank where the PPF account was established. 

Section 1

This section is the general declaration section where basic information needs to be provided. The account holder must submit their PPF account number along with the withdrawal amount and the total tenure of the investment.  

Section 2

This section is for the reference of the office. It entails essential information such as 

• Date of Inception of the PPF account 
• Balance amount in the PPF account 
• Date of previous withdrawal granting. 
• Amount of withdrawals available in the PPF account 
• Amount authorised for withdrawal 
• Signature of the concerned employee 

Section 3

This section concerns the information the bank requests regarding the funds which are to be disbursed. Whether the withdrawal amount shall be directly credited to the bank account or the bank will be required to issue a DD (Demand Draft). A copy of PPF passbook shall be attached with the application too. 

Where to Open a PPF account?

The PPF is one of the most secured financial instruments a long-term investor may avail. Any investor who wishes to invest in this lucrative and secure investment scheme can do so through 

• Post Offices 
• Selected Private Banks 
• Nationalised Banks 

Find below the List of Banks that Provide Provisions for Opening PPF Accounts. 

1. Indian Overseas Banks 
2. Axis Bank 
3. ICICI Bank
4. IDBI Bank 
5. State Bank of India 
6. Bank of Baroda 
7. HDFC Bank 
8. Corporation Bank 
9. Oriental Bank of Commerce 
10. Bank of India 
11. Central Bank of India 
12. Allahabad Bank 
13. Canara Bank 
14. Union Bank 
15. United Bank of India 
16. Indian Bank 
17. Punjab National Bank 
18. Dena Bank 
19. Vijaya Bank 
20. Bank of Maharashtra 

Public Provident Fund Eligibility Criteria

The Government has set broad eligibility criteria for the scheme to attract many investors. 

• Any Indian citizen living in the country is eligible to apply and obtain a PPF account. Even a minor is eligible to open a PPF account on the condition that their guardians manage it. 
• NRIs cannot open a PPF account. If they have an existing account, the provision of extension is absent for them and exclusive only to Indian citizens.

FAQ’s about Public Provident Fund