Public Provident Fund (PPF) Scheme

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Public Provident Fund Scheme popularly known as PPF Scheme under The PPF Act 1968, was introduced by Central Government to boast long term savings, initially for the self employed persons and working force in the unorganized sector, in order to have a sizable savings  for his/her old age. Thereafter the scheme has been extended to the all sections of the society. At present this scheme is considered to be one of the best “Tax Saving Scheme” under 80-C of The Income Tax Act, 1961.

Who can open a PPF Account:

  • Any Indian Resident individual above the age of 18 can open a PPF Account. A minor’s account can also be opened by his natural guardians i.e. his parents i.e. mother or father. By filling an account opening form (Form A), and submitting passport-sized photograph, copy of PAN and address proof to the designated institution, one can open PPF account.
  • One person can open only one account. But an account opened in the name of minor child is valid. In a family comprising husband, wife and two children a maximum number of four accounts can be opened – two for themselves and two for their two children.
  • Non Resident Indian (NRI) is not allowed to open a PPF account, but incase an account opened before he is declared NRI, can be maintained till maturity, but no further extension shall be allowed to that account.
  • Since 13th may, 2005, Hindu Undivided Family (HUF) is not allowed to open a PPF account but if previously such account existed, that account could be maintained only till immediate maturity and no further extension is allowed.

Where PPF Account can be opened:

  • Selected Post Office Branches
  • At State Bank of India and its subsidiaries
  • Selected Branches of Scheduled Commercial Banks in India

PPF Rules & Guidelines to operate:

  • Tenure of a PPF account is normally 15 years, but can be extended for a block of 5 years for any number of times.
  • A minimum deposit of Rs.500/- and further in multiples of Rs.500/- is acceptable in the account. A maximum amount of Rs.150000/- is allowed to be deposited in one year.
  • Total number of deposit allowed in PPF account is 12 with a compulsory minimum of 1 deposit. There is a provision of penalty if a person skips to deposit minimum amount in one financial year.
  • Interest at a particular rate (Announced by the Central Government from time to time) is credited every year in the account. The interest thus credited is tax-free. Current rate of interest being allowed to PPF account holders is 8.10% pa.
  • Deposit in the PPF account is exempted for individual tax payer under section 80-C of The Income Tax Act, 1961. From 1st of April, 2016, interest is to be paid on quarterly compounding basis, which was previously on yearly basis.
  • Entire maturity proceeds are also tax free in the hands of the PPF account holder including the interest.
  • Nomination to PPF account can be made in favour of the family members.
  • In case of urgency loan is allowed to the PPF account holder between 3rd financial year to 5th financial year against the deposit to the extent of 25% of balance at the end of 2nd year, with interest @ 2% above the rate of interest of PPF Deposit. The loan can be repaid by monthly installments in 36 months.
  • Part withdrawal is allowed in PPF account but with a lock-in period of 5 financial Years, from the date of opening of the account.
  • However, recently (w.e.f 18th June, 2016) Central Government has announced certain pre-mature withdrawal rules to make this scheme more popular. Under certain extreme circumstances of illness of self, spouse or dependent children or parents and for higher education of self, spouse or dependent children with documentary proof, a person can close the PPF account after a lock-in period of 5 years. Under this, the interest payable to the account holder shall be 1% pa less than the already applied interest

Benefits of PPF Accounts:

  • A deposit of Rs.1.50 Lacs in PPF account is exempted under Section 80C of The Income Tax Act, 1961. Deposit in the account of spouse or the children is also eligible for exemption under 80C.
  • Entire maturity proceeds of PPF account is Tax Free, may it be principal amount or the interest
  • PPF account cannot be attached by any court of law for discharging any debt or liability. Therefore, the proceeds belong to the account holder after maturity or to the nominee in case of death of the account holder.
  • PPF account can be transferred anywhere in India with facility of such transfer to any designated institution.

Drawbacks of PPF Scheme:

Inspite of the very attractive and good scheme there are certain drawbacks of this scheme which are as under:

  • It is considered as a long term investment, which blocks money for longer tenure. Loans and withdrawals allowed in the scheme are negligible. After the pre-mature rules announcement, this drawback of this scheme is now no more applicable.
  • Rate of interest in this scheme is quite low as compared to the inflation rate of the country.

Maturity/Extension Rules:

A PPF account holder has three options at the time of maturity:

  • He/She can take the proceeds of maturity amount with interest, which is totally tax free.
  • He/She can request for extension of the account for a block of 5 years, for any number of times and can make further deposits in the account
  • He/She can request extension of the account for further block of 5 years, without deposit in the account, just to avail the benefit of tax free interest every year.
  • Here also he/she can withdraw 60% of the balance at the beginning of the extended period from the account any point of time.

All the above features make PPF scheme one of the best “Tax Saving Scheme”

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