What are PPF, its benefits, and how it works?

PPF is the short form of the Public Provident Fund. It is an exclusive long-term investment tool, offering lucrative rates of interest and satisfactory returns on the invested amount. One of the biggest advantages of PPF is that both the accumulated interest and the returns earned are non-taxable as per the rules of the Income Tax Act. 

You need to simply open a PPF account under this special scheme, and the deposited amount during the course of one year gets claimed u/s 80C of the IT Act. 

Exclusive features of the PPF account

Some of the most highlighting features of a PPF account are:

Tenure: 

The minimum tenure for PPF is 15 years. You can further extend it in multiples of 5 years according to your requirement and preference. 

Limits of investments: 

The minimum investment limit is INR 500, while the maximum is capped at INR 1.5 lakhs for every financial year. You can either make a single-time lump sum investment or in multiple installments, the maximum being 12. 

Opening balance: 

A PPF account can be opened with a minimum value of INR 100 in one month. Any annual investment exceeding the limit of INR 1.5 lakhs is neither eligible for earning any interest nor do they qualify for tax savings.

Frequency of deposit: 

A PPF account deposit must be made once every year for at least 15 years. If you extend the tenure, you have to enhance the frequency accordingly.

Deposit mode: 

You can easily deposit in any PPF account through multiple deposit options including cheque, cash, online transfer, and DD.

Nomination: 

Any concerned PPF account holder can nominate any other member either during account opening or in the subsequent years to receive the accumulated amount on the death of the account holder. 

Joint account feature: 

One of the major disadvantages of a PPF account is that the joint account facility is unavailable here. Every account must be held in the name of a single individual only. 

Risk involved: 

As this is a government-backed investment scheme, the risk involved is minimal. A PPF investment ensures secured capital and risk-free, guaranteed, fixed returns. The PPF accounts are generally used as a potential financial diversification element for the efficient portfolio management of the concerned investor. 

Tax benefits: 

The interest earned from PPF and the final maturity amount are both tax-free u/s 80C of the IT Act, 1961. 

Withdrawal: 

Although the PPF account does not allow withdrawal, however, you are eligible for partial withdrawal only after the completion of the initial six years.

Interest rate:

The PPF interest rate is decided by the government and is liable to change from time to time. At present, this rate of interest stands at 7.1% per annum, with an annual compounding facility. This interest gets calculated on the minimum balance between the 5th-day closing and the ending date of each month. However, you can easily use a PPF calculator to know the results. Once you enter all the relevant details, a PPF calculator works automatically to reveal the results.

The working strategy of a PPF account

Any Indian can open a PPF account on behalf of themself or of a minor. However, you must remember that there has to be only one PPF account per person. It is not eligible for HUFs or NRIs. The deposit amount ranges between INR 500 to INR 1.5 lakhs every financial year. However, you have to ensure depositing the fixed amount every year, either in a lump sum or in installments. These deposits enjoy tax exemption. 

You can even avail of a loan facility on your existing PPF balance. Moreover, there are advantages of premature and partial withdrawals under specific circumstances. Depending on your financial conditions, you can even opt for account closure. 

The tenure of the existing account can be extended for 5 more years for Indian account holders on completion.

Benefits of PPF accounts

As this is a government-backed scheme, it involves minimal risk. It ensures capital security with guaranteed, risk-free returns, maintaining an attractive interest rate.

PPF belongs to EEE tax status. The investment amount of up to INR 1.5 lakhs yearly gets deducted from your limit of taxable income. The earned interest is tax-free, and so is the maturity amount that you receive after 15 years.

You can inculcate a habit of savings through PPF, by opening an account with a mere INR 100. The minimum yearly investment amount is INR 500, while the maximum limit is INR 1.5 lakhs. 

PPF comes with a solid lock-in of 15 years. However, you can opt for partial withdrawal from the 7th year onward. Moreover, you can make a loan application from the 3rd year up to 25% of the current balance. However, you have to ensure loan repayment within 36 months. You can even choose account closure under pressing circumstances. 

The minimum tenure of a PPF account is 15 years, after which you may choose to extend it further in blocks of another 5 years.

Conclusion

We highlighted all the basic aspects of a PPF account and PPF calculator. Without any further delay, open one of your own if you still don’t have one.