The Public Provident Fund or The PPF scheme

Public Provident Fund –  The Public Provident Fund or The PPF scheme is fully guaranteed by the Central Government (National Savings Institute of the Ministry of Finance in 1968. ), which makes it a risk-free investment proposition.

Product Features

Risk-free return with Tax benefit: Attractive interest rate of 7.9% (varies every year) that is fully exempted from Income Tax under section 80 C. PPF falls under the EEE tax basket. The total amount received upon maturity and the interests earned are both exempted from income tax. Contributions to the PPF accounts of the spouse and children are also eligible for tax deduction.

Compounded interest rate: The interest rate on PPF is compounded annually. The interest in PPF deposits is calculated on the minimum balance between the fifth and at the end of the month. The interest on PPF deposits is calculated and becomes due every month but is credited only at the end of the financial year i.e. 31st of March, every year. Therefore, if you are planning to invest a lump sum in your PPF account, we recommend you do it before April 5, to get the maximum amount of interest for your deposits.

Deposit Amount: Minimum: Rs.500 and Maximum: Rs.1, 50,000 in one financial year for 15 Years. Failing to make a minimum deposit makes the PPF account inactive. Reactivation charge is Rs 50 per year for inactivation. Deposits can be done maximum in 12 transactions

Loans against PPF balance: Loan can be availed on the balance of one’s PPF account between 3rd to 6th financial years In case of any monetary emergencies

Withdrawal upon emergency: Partial withdrawal facility can be availed from 7th financial year onwards

Extension of a PPF account: Account can be extended in a block period of 5 years after maturity

Deposits to Public Provident Fund (PPF) Accounts can be made in the form of cash, cheque and electronic medium.

Transfer of a PPF account: Transfer of a PPF account can be done across the bank branches, or any other bank, or Post Office, at the request of the PPF account holder. This service is free of charge.

Joint Account: You cannot open a joint account with another individual. The account can only be opened in one person’s name.

Court decree: A PPF account cannot be attached by a person or entity to pay off any debt or liability. Further, even a court order or decree cannot make a person liable to pay off his debts using money from his PPF account.

Nomination: Nomination facility is available. A person can nominate a minor in his/her account. However, no nomination is allowed in respect of an account opened on behalf of the minor.

List of all forms in the PPF account

The following table represents all the forms that are related to the PPF account.

Forms	Nature of the Forms
Form A	For opening a Public Provident Fund account
Form B	For making deposits in the PPF account and repaying the loans against the PPF account
Form C	For partial withdrawals from the PPF account
Form D	To apply for a loan against the PPF account
Form E	Adding a nominee for the PPF account
Form F	Changing the nomination for the PPF account
Form G	For the claiming of funds in  a PPF account by a nominee or the legal heir
Form H	For extending the maturity of the PPF account (1 or 5 years)

Few instances when the PPF account may become irregular

When a PPF account becomes irregular i.e. Non-adherence of the rules governing PPF accounts can lead to the account being termed as irregular by the government. The account may be closed, contributions may be returned, and interest payments can be stopped. Regularising the PPF account after this may be a long-drawn process.

Opening of more than one account: The PPF rules allow only one account to be opened in one name. People having a PPF account in the bank cannot open another account in the post office and vice-versa. Even in the application form, the undertaking goes like this - "I hereby declare that I am not maintaining any other Public Provident Fund Account, except an account on behalf of a Minor." If two accounts are opened by someone by mistake, the second account will be treated as an irregular account and will not carry any interest unless the two accounts are amalgamated. One has to approach the Ministry of Finance (Department of Economic Affairs) for the approval to amalgamate them.

A PPF account on behalf of a minor can be opened by either the father or mother. To avoid having more than one account, both the parents cannot open a separate account for the same minor. An individual may, therefore, open one PPF account on behalf of each minor of whom he is the guardian.

Annual contributions more than Rs 1.5 lakh: If contributions in excess of Rs 1.5 lakh are made during a year by the accountholder, the deposits in excess of Rs 1.5 lakh will be treated as irregular subscriptions and will neither carry any interest nor will this excess amount is eligible for tax benefit under Section 80C of the Income Tax Act. This excess amount will be refunded by the post office to the account holder without any interest.

Joint account: There is no provision to open a joint PPF account. In case it has been opened in joint names, the deposit offices have been authorized to close such irregular accounts. One is allowed to furnish details of a nominee, and not of a joint holder.

Extend the account with contribution: The PPF account may be extended indefinitely after the end of the tenure of 15 years. But, it may turn irregular if one continues investing during extension without intimating the post office. If you want to extend the account and even keep making fresh deposits, the post office has to be intimated one year before the expiry in writing by filling up the Form H. If one keeps depositing without furnishing this Form, then all new deposits will be treated as irregular and no interest will be paid on them. The benefits of Section 80C will not be available on deposits made in the PPF account after expiry of 15 years without exercising option for continuance of the account.

Premature closure of the PPF account

Conditions to close the PPF account prematurely

a)    The account should have completed at least five financial years.

b)    Premature closure of PPF account will be permitted in the following cases

•        Treating serious ailments or life-threatening diseases of the account holder, spouse, dependent children or parent.

•        To fund higher education of the account holder or minor account holder.

•        Not allowed to fund the higher education of spouse or dependent child.

•        Premature closure of the account of a minor can be carried out by his guardian.

The person withdrawing has to forgo 1 percent of the interest earned on the interest rates applicable from the date of opening the account till the date of premature closure.

1.    Written application: To close a PPF account prematurely, a written application needs to be submitted to the accounts office where the account is held. The application needs to state the reason for the account holder opting to close the account.

2.    Documentation: The application should contain a copy of the PPF passbook. It should also be supported by documents from a competent medical authority if the purpose cited is medical treatment. If the purpose is supporting higher education, documents such as fee receipts, bills, and confirmation of admission should be provided.

Points to be noted:

The provision for partial withdrawal from PPF account after completion of 7th year of the account is still valid and no penal interest is charged.

Instead of Closing PPF Account, the subscriber can opt for Loan against PPF balance or Partial Withdrawal from PPF account

                                    Loan against the PPF balance

1.    Application for Loan against PPF balance to be done with Form D and Passbook.

2.    The loan amount is capped at a maximum of 25 percent of the balance available in an immediate preceding year in which you are applying for. For example, let us say you opened the account in November 2012.  You will be eligible to avail loan from 1st April 2015. The amount eligible for a loan will be 25% balance available in your PPF account as of 31st March 2015.

3.    The tenure of 36 months is calculated from the first day of the following month in which the loan is sanctioned. For example, if the loan was sanctioned on any day of July, then the tenure of 36 months of the loan starts from August. You can avail Loan up to the 6th FY of account opening. Let us say you opened the account in November 2011. Then you can avail loan from FY 2014-15 to FY 2016-17 i.e. up to 31st March, 2017. Because from FY 2017-18 onward, your account will be eligible for withdrawal only.

4.    Interest rate charged on The loan against PPF balance is two percent higher than the prevailing interest rate set by the government. Hence, if the current rate of interest on PPF is 7.9%. Therefore, the interest rate for a loan on PPF will be 9.9%. PPF loan interest is linked to the interest rate of PPF. So you have to remember that interest on a loan will also change based on the yearly change in PPF.

5.    You can’t apply for a new loan until the old loan has been paid off along with interest. You are eligible to avail of a loan only once in an FY. Even if you repaid the loan within a year, then you are not allowed to take the fresh loan within the same FY. Let us say you took the loan on 13th August 2016 and repaid the loan on 25th January, 2017. Then you are not allowed to take the fresh loan up to 31st March, 2017.

6.    In case the loan is not repaid within 36 months, then the applicable interest rate would be 6 percent instead of 2 percent mentioned above from the date the loan was sanctioned till the loan has been repaid.

7.    In case any interest or part of it remains due but the principal is repaid, then the outstanding interest will be debited from the subscriber's account if it remains unpaid during the tenure of the loan, i.e., 36 months.

8.    The repayment of the principal amount must be done either as a lump-sum or in two or more monthly installments.

9.    Once the principal amount is paid, then only can you pay the interest on the loan amount.
You cannot make the repayment of interest in more than two monthly installments.

10.  Your loan repayment (either principal or interest) will not be eligible for rebate under Sec.80C.

Financial Year	Opening Balance	Fresh Deposit	Interest Rate	Closing balance
2015-2016	0	150000	8.70%	163050
2016-2017	163050	150000	8.70%	340285
2017-2018	340285	150000	8.70%	529998

Loan Eligible amount (FY 2018-2019) = 25% of the balance on 31st Mar 2017

                          = 340285 × 25%

                                                                                     = Rs 85071

 

                                                  Partial Withdrawal from the PPF account 

Partial Withdrawals in PPF account before the extension of PPF account

If you have not extended your PPF account Partial withdrawals from PPF are permitted after the expiry of 5 years from the end of the year when the subscription was made. For example, a PPF account is opened in December 2010 which is FY 2010-11. 5 years from the end of FY 2010-11 is after 31 Mar 2011 i.e you will be eligible for partial withdrawals from 1st April 2016 (FY 2016-17).

1.    Only one withdrawal can be made per year.

2.    For Withdrawal One has to apply using Form C along with the passbook of the account.

3.    If you are withdrawing from minor’s Account, the guardian has to make a declaration that the money is required for the use/benefit of the minor.

4.    As per the PPF scheme rules, a person can withdraw lower of the following:
a) 50 percent of the balance available at the end of fourth year immediately preceding the year of withdrawal; or
b) 50 percent of the balance stood at the end of the preceding year

For instance, if your PPF account was opened during the financial year 2011-12 and if you visit the branch any day during FY2017-18 to apply for a loan, then the amount you are eligible will be calculated as:

Financial Year	Opening Balance	Deposit	ROI	Balance
2011-12	₹                             -	₹ 100,000.00	8.60%	₹ 108,600.00
2012-13	₹           108,600.00	₹ 100,000.00	8.80%	₹ 226,957.00
2013-14	₹           226,957.00	₹ 100,000.00	8.70%	₹ 355,402.00
2014-15	₹           355,402.00	₹ 150,000.00	8.70%	₹ 549,372.00
2015-16	₹           549,372.00	₹ 150,000.00	8.70%	₹ 760,217.00
2016-17	₹           760,217.00	₹ 150,000.00	8.10%	₹ 983,945.00
Withdrawal amount: Lower of 50% of (a) or (b)
a) Preceding Year (2016-17)				₹ 491,972.00
b)Preceding 4th year (2013-14)				₹ 177,701.00

Partial Withdrawals in PPF account after extension of PPF account

If you have extended your PPF account i.e. you have completed your PPF account for 15 years and have extended it by 5 years.

1.    One withdrawal is permitted in every financial year.

2.    The total amount of withdrawal is restricted to 60% of the credit balance at the start of the extension block of 5 years.

3.    For Withdrawal One has to apply using Form C along with the passbook of the account.

Things to do when your PPF matures

Maturity: Completion of 15 years of the account takes place from 1 April of the year following the date of opening of the account.

Account closure: Subscriber has to give an application to bank/post office, stating PPF account number and details of bank account in which proceeds have to be credited.

Extension of PPF account without contribution: The PPF account automatically gets extended for a period of 5 years unless the subscriber closes the account. There is no action required from the subscriber. The subscriber continues to earn interest on the balance in the PPF account. However, he cannot make any fresh contributions to the account.

Extension of PPF account with contribution: If the subscriber wishes to continue contributing to the PPF account after its maturity, he must submit Form H to the bank/post office before the end of one year from the maturity date of the PPF account. On choosing this option, the subscriber can make further contributions and continue to get tax benefits under Section 80C.

Keeping in mind

a)    One can open a new PPF account after the closure of the existing PPF account.

b)     Once Form H is submitted for extension of the account with a contribution, one can withdraw only up to 60% of the PPF balance at the beginning of 5 year period.

Smart Reinvestment Option

However, the lump-sum amount received from PPF Account maturity at the end of fifteen years can be put into smarter avenues. Top investment options for the investors are Extended PPF, Mutual Funds, Unit Linked Plans, Fixed Deposits including Tax saving ones, Tax saving Government Bonds, Corporate Bonds or Corporate FDs,...etc which we are going to discuss in our later articles in detail.