PPF Scheme one of the most tax efficient instruments in India. It was launched by the Ministry of Finance (MoF) in India in the year 1968. 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%. This rate has been revised in the Union Budget 2017 for FY: 2017 – 18 to 8%.
Deposits made towards PPF accounts can be claimed as tax deductions. It was introduced by the Indian government to encourage savings among people in general, especially to encourage them to create a retirement corpus. Public provident fund accounts can be opened at any nationalized, authorized bank and authorized branches/post offices. PPF accounts can be opened at specific private banks as well. These accounts can be opened by submitting the relevant documents and depositing the minimum pay-in at such branches/offices that have been authorized for the same and filling out the required form.
Main features of PPF account:
- Interest rates: Interest rates are said by the central government periodically, usually yearly. Interest earned is compounded yearly. (The current rate of interest on a Public provident fund account is fixed at 7.6% p.a.)
- Tenure: 15 years; account continuance is allowed, maturity for 5 years at every refreshing, with or without making additional deposits.
- Initial investment/deposit: Rs.100 for opening the account but a minimum amount of Rs.500 in a financial year.
- 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 instalments in a financial year.
- Withdrawals: Partial premature PPF 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 eligible for tax exemption under Section 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: Loan facility can be availed against funds held in the PPF account from the third financial year.
- Renewal: Renewal or extension of the scheme is allowed, for a period of 5 years at a time and can be extended within 1 year of maturity.
- Joint accounts: Not allowed.
Eligibility for opening PPF account:
- Per person can open only one PPF account. Resident Indians, 18 years or older, can open a Public Provident Fund Account. With no upper age limit for opening this account.
- Accounts can be opened for minors. Minors are those below the age of 18 years. However, the maximum limit of Rs.1.5 lakhs per year applies to deposits made in the minor and the major’s/guardian’s account, collectively. Grandparents cannot open an account in the names of their minor grandchildren.
- Non-resident Indians (NRIs) cannot open a PPF account. However, account-holders who leave the country and obtain non-resident status after having opened a PPF account can continue to maintain their accounts until it matures i.e. until the end of the account’s 15-year term. NRIs are restricted from extending account tenures at maturity.
- HUFs cannot open a PPF account, effective 2005. Those accounts opened by HUFs before May 13, 2005, can be continued until maturity without further extensions. An individual cannot open an account for a HUF (Hindu Undivided Family).
- Foreigners cannot open a PPF account.
Documents required for opening PPF account:
Documents mandatory to open a PPF account are KYC documents such as identity proof, address proof, and signature proof. These commonly include the latest version of a person’s
- Passport, PAN Card, Aadhar Card, Driving License, Voter’s ID, Employer’s letter, Utility Bill, Rental/Lease Agreement, Bank Account Statements, Ration Cards, Signed Cheque
- The account opening form, with nomination form if nominees are being named.
- This is not an exhaustive list. Banks may request additional documents if necessary. In case of minors, age proof will be required i.e. the minor’s birth certificate or school certificate.
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.