Over decades, Public Provident Fund (PPF) has remained one of the most popular and accepted investment alternatives, particularly for the risk-averse investors who are highly satisfied with the moderate but guaranteed returns. Amid the rising popularity and acceptance of other investment avenues like mutual funds and the National Pension Scheme (NPS), PPF is highly trusted due to its sovereign guarantee from the Indian government on the interest and principal invested. However, despite this acclamation, many retail investors are unaware of the most crucial facts linked with the PPF account.
Go through some of the crucial facts on the Public Provident Fund (PPF):
Returns
Presently, the PPF interest rate is 7.10% that is annually compounded. Based on the government bond yields, the Finance Ministry reviews the rate of interest every financial quarter. PPF returns come with EEE (Exempt-Exempt-Exempt) tax status, which means the interest component earned, the proceeds gathered on maturity as well as investments are exempt from tax as per Section 80C. Tax-free status endows the PPF instrument a benefit over the five-year tax-saving Fixed Deposit (FD) from post office and banks as their interest income are taxable according to the depositor’s income tax slab.
Extension in a block of five years on maturity
On maturity towards the end of fifteen years, you will get the option to either close your account and withdraw the amount or extend the maturity period in blocks of five years without or with new deposits. In case you continue with the Public Provident Fund account without making a fresh deposit, then you will not be required to inform the bank branch of this extension as this will be considered automatically as extended. However, you should remember, no fresh deposit in your Public Provident Fund account will be allowed thereafter. For the upcoming five years, the Public Provident Fund balance will continue to earn the applicable interest. To continue your Public Provident Fund with fresh deposits, you should intimate the branch before the expiry of one year before maturity.
Partial liquidity
Public Provident Fund (PPF) provides liquidity via partial PPF withdrawal. PPF holders can make one withdrawal each year from the seventh year of opening the Public Provident Fund account. The amount for withdrawal should not be more than 50 percent of the available balance towards the end of the fourth year instantly preceding the year or the amount at the preceding year-end, whichever is less. Withdrawal made before the maturity period is completely tax-exempt because PPF falls under the EEE (Exempt Exempt Exempt) category. However, it is crucial to declare all the PPF withdrawals when you file income tax returns.
Premature closure
To become eligible for premature closure, you should have completed at least five financial years. However, you will be permitted premature closure just in the case of your death, for treatment of life-threatening diseases or ailments for yourself, your parents, spouse, or kids or if the amount is needed for the higher education of the minor holder or the holder. You will need to submit the supporting documents from the competent medical authority or the fee bills for admission confirmation from the recognized institute of higher education abroad or in India. Note that such premature closures will attract penalties. You will get a 1 percent less PPF interest rate as compared to the applicable PPF interest rate from the account opening date till such premature closures.
Loan against PPF
You can get the loan against Public PPF from the third financial year up to the sixth financial year to the extent of twenty-five percent of the deposited amount towards the end of the 2nd year instantly preceding the year when the loan is applied. Your loan is repayable in either 1 lump sum or in 2 or more instalments within a span of three years from the loan sanction day. After principal repayment of a loan, you should repay the interest in not more than two monthly instalments at a 1 % p.a. rate over the applicable PPF interest rate of the principal component. The interest on the outstanding loan will be charged at 6 percent p.a. over the applicable PPF interest rate if you fail to repay the loan in parts or full in 3 years.
PPF account transfer
The Public Provident Fund account transfer option is available for different reasons such as job transfer or to avail superior services in case you are unsatisfied with your current account provider. For initiating the transfer, you are required to visit your existing bank or post office and submit the transfer request. Once the provider receives the request, it will offer a closure document, which is necessary to transfer & open the account with the new provider. To start the bank-to-bank transfer, opening a savings bank account with a new bank is crucial. In case you are an existing bank customer, then you can open a PPF account by submitting a fresh account opening and nomination form along with an original passbook of your past PPF account provider.
Final thought
Public Provident Fund is best for the risk-averse investors who give more importance to capital protection than growth. With the advantages like sovereign guarantees and tax-free returns from the Indian government, the public provident fund comes across to be one of the safest funds amongst all the available investment options. However, the investors with a medium to high-risk tolerance with a term horizon of 5 years or more should prefer equity funds in mutual funds over public provident funds. It is because, equity funds being an asset class, hold the potential to beat inflation and fixed income instruments, involving PPF over the long run by a wide margin. If you want to save tax as per Section 80 C, consider investing in the ELSS fund. It is a special category of equity mutual funds that has the shortest lock-in period of 3 years.
