PPF account and why you should open it

A Public Provident Fund (PPF) account is a popular investment option for individuals looking to save for long term financial goals, like building a retirement corpus, or financing children higher education. The scheme is backed by the Government of India, and it provides guaranteed returns and tax benefits. The interest rates are declared every quarter by the government.

On similar lines, Employee Provident Fund (EPF) is a retirement savings scheme available to salaried employees. Both PPF and EPF share some similarities but differ in certain aspects. While EPF is designed to help employees save for their retirement, PPF is open to all individuals, including self-employed professionals, and offers a more flexible investment option.

A PPF account can be a good investment option for individuals looking for a secure, long-term investment that provides guaranteed returns. In this article, we will delve deeper into the various features of a PPF account and understand why it is a smart investment option.

Flexibility and Higher Interest Rate

A PPF account provides flexibility to the account holder, allowing contributions in multiples of Rs. 100, up to a maximum limit of Rs. 1.5 lakhs per annum. A PPF account also offers a higher interest rate. The current interest rate (as on Jul 2023) on a PPF account is 7.1% per annum, which is higher than most other fixed-income investment options such as bank fixed deposits, savings accounts, and post office schemes.

Tax benefits

Under the EEE (Exempt-Exempt-Exempt) model, the contributions made to the PPF account, the interest earned on the account, and the amount received at maturity are all tax-free. This makes PPF one of the most attractive investment options for individuals looking to save tax.

The EEE model makes the PPF account a very lucrative investment option, particularly for individuals who fall under the higher tax brackets. It provides not only tax benefits but also a safe and reliable investment avenue with a high rate of return.

Provision of taking loan against PPF

Another advantage of opening a PPF account is that it allows individuals to take loans against their account balance. PPF account holders can avail of loans from the third financial year of opening the account until the end of the sixth financial year. The loan amount can be up to 25% of the account balance at the end of the second preceding financial year.

As an example, an individual who opens a PPF account in 2021-2022, can avail a loan between 2023-2024 and 2026-2027. If you take a loan in the year 2023-24, the loan amount allowed is up to 25% of the account balance at the end of 2021-2022.

Loans availed against a PPF account attract comparatively lower interest rates, generally it is around 1%. The loan needs to be fully repaid within 36 months, and the interest accrued on it should be paid as a lump sum along with the principal amount at the time of repayment.

Taking a loan against a PPF account can be a cost-effective way to meet financial requirements without liquidating the PPF account balance, which can lead to a loss of interest income and tax benefits. However, individuals should exercise caution while taking a loan and ensure that they can repay the loan within the stipulated time to avoid any penalties or defaults.

Partial Withdrawals

In addition to the tax benefits and loan facilities, PPF also offers the flexibility of partial withdrawals. After completing five years of account opening, one can withdraw a portion of the balance in the PPF account. The amount of partial withdrawal is limited to 50% of the balance at the end of the fourth year preceding the year of withdrawal or 50% of the balance at the end of the immediately preceding year, whichever is lower.

As an example, an individual who opens a PPF account in 2021-2022 can avail of a partial withdrawal from the financial year 2027-2028. If you want to withdraw in the year 2027-28, the withdrawal amount is a minimum of 50% of the amount at the end of the financial year 2026-27 and 2023-24.

The partial withdrawals can be made once every financial year. Partial withdrawals can be made for purposes such as medical emergencies, higher education, and other financial requirements.

It is important to note that partial withdrawals will affect the overall balance in the account and may impact the final maturity value. Hence, it is advisable to exercise caution while making partial withdrawals and try to minimize them as much as possible.

Tenure Extension

Tenure extension is another feature that makes the PPF account a preferred choice among investors. The PPF account comes with a minimum lock-in period of 15 years, which can be extended in blocks of 5 years, indefinitely. This means that even after the completion of 15 years, investors can choose to keep their account active and continue earning tax-free returns on their investment.

By opting for tenure extension, investors can continue to enjoy the tax benefits of the PPF account, while also earning a higher rate of interest compared to other fixed-income instruments. Additionally, investors can also continue to make fresh deposits into their account, subject to the overall limit of Rs. 1.5 lakh per annum.

PPF account can also be opened for minors

Opening a Public Provident Fund (PPF) account for a minor is a great way to start saving for their future. PPF is a long-term investment option, and starting early can help in building a significant corpus over time.

The account can only be opened by the minor's parent or legal guardian. The minor must be either a resident of India or a citizen of India residing abroad. The account will be in the name of the minor, with the parent or legal guardian acting as the guardian of the account.

The minimum deposit for a PPF account for a minor is the same as that for an adult, which is Rs. 500. The maximum deposit limit for a financial year is also the same, which is Rs. 1.5 lakh. The tenure of the account will be 15 years from the end of the financial year in which it was opened.

Partial withdrawals from the account are also not allowed to the minor child until the minor attains the age of 18 years. However, the parent or legal guardian can make withdrawals up to a maximum of 50% of the balance in the account at the end of the fourth year preceding the year of withdrawal. However, this withdrawal amount should be used for minor’s benefit only.

Conclusion

In conclusion, a PPF account is an excellent investment option for individuals looking for a secure, long-term investment that provides guaranteed returns, tax benefits, and flexibility. With its high-interest rate, tax benefits, and flexible contribution options, a PPF account is an important investment option that can help individuals achieve their long-term financial goals.

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