how to invest in ppf account for tax benefit and maintain it properly

So, you want to know how to maintain PPF account for tax benefit.

Public Provident Fund (PPF) is one of the good investment options in India. Every time when anybody asks me “I have not enough money. How can I start my Investment”, my answer is “Start with PPF Account”.

I think it is one of the favorite savings and investment options to many investors.

However, it has some pros and cons. You have to follow some rules if you want to invest in PPF. I will explain it one by one.

The following points are very useful to know the PPF very well:

1) What is PPF?

PPF or Public Provident Fund is a debt-based scheme of the Govt. of India. It is a long term investment option. It is a savings-cum-tax- saving investment which provides you an opportunity to build your retirement fund.

The PPF scheme was introduced by the National Savings Institute of the Ministry of Finance in 1968. The main objective of that scheme is to raise awareness among the people about the benefit of small savings. Besides that, it offers a reasonable return with a benefit of tax savings.

You can open your PPF account in any Nationalized Bank or in any Post Office. Bank will provide you an option for online deposit in your PPF account whereas Post Office does not provide such service.

2. Eligibility

Only individual, who is resident in India, can open a PPF account. A person cannot open more than one PPF account in his/her own name.

Any NRI (Non-Resident Indian) can’t open a new PPF account. However, they can continue their existing PPF account until the maturity.

It must be remembered that joint ownership is not allowed.

A minor is also eligible to open a PPF account with his or her guardian. Here the guardian means father or mother or a court-appointed guardian. Therefore, both father and mother of the minor cannot open a PPF account on behalf of the minor.

Grand Parents cannot open a PPF account on behalf of the minor except in the cases where both the parents are dead.

3. Tenure of the PPF Account

The duration of the PPF account is 15 years. However, the account can be extended on application made by the account holder. The extended period is one or more block of 5 years each.

4. Amount of the Investment

According to the Public Provident Fund Scheme (Amendment) Rules 2014, the initial subscription in PPF account shall be a minimum of Rs. 100.

However, the minimum amount to be invested in the PPF account per annum is Rs. 500. It must be remembered that the minimum amount of Rs. 500 has to be deposited each year to keep the PPF account active. Otherwise, it will be inactive.

The maximum amount that can be deposited in PPF account is Rs. 150000 per annum. Any amount in excess of Rs. 150000 shall be useless. You can’t earn any interest on such excess deposited amount.

Again, as per section 80C of the Income Tax Act, the maximum amount of deduction shall be Rs. 150000. So, if you deposit any excess amount that should not be beneficial for tax savings.

The amount can be deposited in lump sum or in a maximum of 12 installments per annum.

5. Interest rate of the PPF account

At present, the rate of interest of the PPF account is 8.00% per annum (with effect from 1^st October 2018).

PPF interest rates were earlier revised annually but from 2016 onwards, these rates are revised quarterly.

Interest on this account will be paid on 31^st March every year. The amount of interest will be calculated on the lowest balance between the close of 5^th day and the last day of every month.

6. Loan Facility of PPF Account

You can take a personal loan against the balance available in your PPF account. You can avail your loan between the 3^rd and 6^th financial year of opening your account.

The maximum loan amount is 25% of the balance in the PPF account at the end of the 2^nd year immediately preceding the year of loan application. Now I will explain it with a simple example.

Mr. Avishek has opened a PPF account on the financial year 2018-19. He will eligible for a loan from the financial year 2020-21. However, he is eligible for applying for this loan up to the financial year 2023-24. It is assumed that his contribution to the PPF account is Rs. 150000 and all the deposits are made on 1^st April of every year. It is also assumed that the interest rate will be 8% for the entire period. Now, what will be the eligible amount of loan on the financial year 2021-22? Let us see the following chart

Year	Opening Balance	Deposit amount	Interest amount (8%)	Closing Balance
2018-19	Nil	150000	12000	162000
2019-20	162000	150000	24960	336960
2020-21	336960	150000	38957	525917
2021-22	525917	150000	54073	729990
2022-23	729990	150000	70399	950389

Loan eligible amount on the financial year 2021-22 will be 25% of the closing balance of the financial year 2019-20 i.e. Rs. 84240 (Rs. 336960 x 25%).

The loan should be repaid within 36 months. You can repay it either by installment or by a lump sum amount.

There is no fixed interest rate on such a loan. It is 2% more than the prevailing PPF interest rate. If Govt. changes the interest rate on PPF account, the interest rate on loan will also be changed. At present the rate is 8%, so the interest rate on loan is 10%. However, once the interest rate is set for any loan then the same rate will be applicable until the repayment period of that loan.

7. Withdrawal from PPF account

You can withdraw from your PPF account starting from the 7^th Financial Year.

The maximum amount that can be withdrawn shall be the lower of the following:

a) 50% of the balance available at the end of the 4^th year immediately preceding the year of withdrawal; or

b) 50% of the balance available at the end of the preceding year.

If we consider the above example then Mr. Avishek will be entitled to withdraw the eligible amount from the financial year 2024-25. Now, what will be the eligible amount? Let us see the chart

Year	Opening Balance	Deposit amount	Interest amount (8%)	Closing Balance
2018-19	Nil	150000	12000	162000
2019-20	162000	150000	24960	336960
2020-21	336960	150000	38957	525917
2021-22	525917	150000	54073	729990
2022-23	729990	150000	70399	950389
2023-24	950389	150000	88031	1188420
2024-25	1188420	150000	107074	1445494

Amount of loan will be lower of the following:

a) 50% of the closing balance at the end of the preceding year (2023-24) i.e. Rs. 594210 (Rs. 1188420 x 50%) or

b) 50% of the closing balance at the end of the 4^th year immediately preceding the year of withdrawal (2020-21) i.e. Rs. 262959 (Rs. 525917 x 50%)

Therefore the withdrawal amount will be Rs.262959.

8. Maturity Option of PPF account

Many of us think that after 15 years the journey of his/her PPF account will over. But it is not like that. You have three options when your PPF account will mature. They are as follows:

Complete withdrawal after 15 years of maturity.	Extension of PPF account without any Contribution	Extension of PPF account with further Contribution
It is a common option to all the investors. You can withdraw the whole amount with interest.	1) This is a default option. If you don’t take any action within one year of your PPF account maturity, this option will be automatically activated. 2) This default option will be for a block of 5 years. 3) You can withdraw any amount from your PPF account but this option can be exercised only once in a year.	1) According to this option, you can contribute a further amount to your PPF account. 2) Remember, you must apply for this option within one year from the date of maturity. 3) Please note that you are eligible to withdraw maximum 60% from your PPF account within the entire 5years block. (60% of the balance at the beginning of each extended period)

Following points are very important:

• You can withdraw your matured amount in installment. But you can use this facility only for one year.
• You can’t open another PPF account unless you close the existing account.
• In the case of option 2, you can withdraw any amount available in your account without any restriction. However, in case of the 3^rd option you are not so free to withdraw. You are eligible to withdraw only 60% of the balance at the beginning of each extended period.
• Once you chose 3^rd option, you can’t switch from it to the 2^nd option. So, you must be very careful at the time of taking the decision.
• However, after completion of your 5 years block, you can choose the 2^nd option for the next 5 years.

9. Different forms used in PPF account

There are different forms for the purpose of maintaining your PPF account. They are as follows:

Forms	Purpose
Form A	Account Opening Form
Form B	For paying contribution to the PPF account and repaying the loan amount.
Form C	Partial Withdrawal
Form D	Loan Application
Form E	Addition of Nominee
Form F	Change of Nominee
Form G	Claim by nominee or legal hair
Form H	Extension of the PPF account after maturity.

10. Different documents required for opening a PPF account

Following documents are required for opening a PPF account:

• PPF account opening form – Form A
• 2 copies Photograph of the applicant
• Identity Proof (Self-attested) like PAN, Aadhaar, Driving license, Voter ID etc.
• Address Proof (Self-attested) like Aadhaar, Driving license, Voter ID etc. You can also use Electricity bill/Bank passbook/Lease agreement of home (Stamped and registered) etc.
• Signature Proof (Self-attested) like PAN, Driving license, Passport etc.
• Pay-in-slip for the contribution in your PPF account or a signed cheque in favor of your PPF account.
• In case of PPF account of a minor, all the above-mentioned documents of parent/guardian are required. Documents related to the minor’s age proof are also another important document. Birth certificate or school living certificate is a valid document for minor’s age proof.

11. Amount of Penalty for inactive PPF account.

It has already been mentioned that the minimum amount of Rs. 500 has to be deposited each year to keep the PPF account active. Otherwise, it will be inactive.

To reactivate, the account holder will pay Rs. 50 as a penalty for each inactive year along with the minimum amount of Rs 500 for each inactive year.

For example, if the number of the inactive year is 3 then the amount of penalty will be Rs. 1650 {(Rs.50 x 3) + (Rs. 500 x 3)}.

12. Premature Closure of PPF account

Premature closure of PPF account will be allowed for the purpose of medical treatment of the family members and for the higher education of the account holder. However, there is also a penalty. A reduction of 1% of the rate of interest will be levied.

For example, if the interest rate is 8% then in case of premature closure the interest rate will be 7% i.e. reduction of 1% from 8%.

13. Benefit of PPF account

The PPF falls under EEE (Exempt, Exempt, Exempt) tax basket. The PPF account has the following benefits:

• Whole of the amount of contribution shall be eligible for deduction under section 80C
• The total interest earned from the PPF account is fully tax-free.
• The total maturity amount of the PPF account is also tax-free.
• You can enjoy the power of compounding by opening a PPF account.
• Investment in the PPF account is totally risk-free. You can use it as a debt portion in your portfolio.
• The scheme is fully guaranteed by the Central Government.
• Balance in PPF account is not subject to attachment under any order or decree of a court

14. Nomination Facility

Nomination facility is available in the PPF account. The PPF schemes give you an opportunity for the nomination of one or more persons. The shares of nominees may also be defined by the account holder. However, no nomination facility is available in case of a minor’s account.

You can change your previous nomination by applying a new nomination in Form F

15. Death of the account holder

In case death of account holder then the balance amount will be paid to his nominee or legal heir even before 15 years. Nominees or legal heirs are not eligible to continue the account of the deceased.

Any loans or interests on loans to be repaid by the subscriber will be deducted before the credit is transferred to the appropriate person(s). If balance amount in the account of a deceased is higher than ₹150,000 then the nominee or legal heir has to prove the identity to claim the amount. (We will discuss it in detail in another article.)

16. How to earn high interest in PPF account

I have already told you the amount of interest will be calculated on the lowest balance between the close of 5^th day and the last day of every month. However, interest on this account will be paid on 31^st March every year.

In order to get high interest, you have to contribute your desired amount before 5^th April of every year. In that case, you can earn interest on the whole of your contributed amount.

On the other hand, in the case of monthly installment system, please be careful about your contribution date. It must be before/on 5^th of every month.

If you deposit your monthly contribution before 5^th of that particular month you will not receive any interest on such contribution for that month. The following example will clear your doubts:

a) Contribute after 5th March.

Suppose the opening balance of your PPF account is Rs. 50000. Now, you want to contribute another Rs. 50000 in your account. You pay it on 8^th March for that financial year. In that case, you will be eligible to get deduction under section 80C but you can’t earn any interest on such additional Rs. 50000.

According to rule interest will be calculated on the lowest balance between the close of 5^th day and the last day of every month.

In this case, your lowest balance is Rs. 50000. Your contribution of Rs. 50000 will not be considered because you paid it after 5^th March.

b) Contribute on or before 5th March.

In the above example, if you will contribute on or before 5^th March, your interest will be as follows:

• For the opening balance of Rs. 50000, you will earn interest for the whole year.
• For your additional Rs. 50000, you will earn interest for one month because you have contributed it before 5^th March.

(You can use PPF calculator provided by jagoinvestor.com)

c) Contribute on or before 5th April.

If you will contribute on or before 5^th April for that financial year then you can earn interest on your total balance of Rs. 100000.

17. Final Word.

Last but not least; PPF is a very good investment option for every individual. However, if you are a salary holder, then you may not use this option for your investment. A salaried person has many debt portions in his portfolio like EPF. He/she is also eligible for gratuity also. So, any other guaranteed investment is not required. They should go for equity. ELSS is the best option for them. (I never suggest you for trading in share market. I always advise you about investment).

Yes, it totally depends on the risk appetite of the person. If you love risk to get the high return you should go for equity. And, if you do not want to take a risk, PPF is good for you (although you have your EPF).

If you are a self-employed person then this investment is a must for you. It must be in your portfolio. It will give you a secured fund for your future.

Finally, if you like this article and think that all the information is good for you and everyone then don’t forget to share it.

 

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