What are the Benefits of Public Provident Fund (PPF)?
The government of India introduced the Public Provident Fund (PPF) in 1968 to encourage small savings as a viable investment form and generate guaranteed returns. As an Indian citizen, you can leverage a PPF account as a savings and tax savings instrument for long-term wealth creation. It can be your retirement fund as well. Moreover, if you have already invested in a scheme but are looking for a secured investment vehicle with guaranteed returns and maximum tax benefits, you should open a PPF account.
This article will cover some of the key benefits of PPF and its prominent features. The amount deposited in the PPF account comes under Section 80C of the Income Tax Act, 1961, and can thus be claimed as a tax deduction.
Additionally, PPF is not market-linked, and thus, your investment is completely secure. You continue accumulating interest over the deposited amount and enjoy the power of compounding. In the next section, we will dive deep into the benefits of PPF.
Benefits of Public Provident Fund
Since its introduction, PPF’s tax benefits and capital security are two key reasons that have made it one of India’s most popular investment tools. Following are some of the noteworthy benefits of investing in PPF:
1. Risk-free returns
One of the most significant benefits of PPF is capital security. As PPF is a government-backed scheme, your invested capital remains secure, and you generate guaranteed returns. Each quarter, the government reviews the PPF account interest rate. As of the quarter ending in June 2022, the interest rate on the PPF account is 7.1%.
2. PPF tax benefits
One of the most prominent PPF account benefits is tax exemption. PPF tax exemption status is ‘Exempt-Exempt-Exempt’ (EEE). Investment in PPF is among the few instruments available in India that offer such tax benefits. A triple ‘E’ tax status implies that the amount invested, the interest you earn, and the funds withdrawn at maturity are all exempt under the Income Tax Act.
To break it down, you can deposit up to Rs. 1.5 lakh in your PPF account in a financial year, and that amount can be claimed for tax deductions. Moreover, interest earned on the deposited amount, as well as the corpus at maturity, is also tax-exempt.
3. Flexibility of investment
Another important PPF account benefit is the investment flexibility it offers. You can also invest a certain amount monthly that contributes to your PPF account. PPF scheme allows deposits up to Rs. 1.5 lakh for each financial year.
However, please note that any amount invested above the limit cannot be claimed under the PPF’s tax benefits. The interest you earn is compounded annually, and experts advise depositing the entire Rs. 1.5 lakh at the start of the financial year to maximise your returns.
4. Loan against PPF account
You are allowed to avail a loan against your savings in your PPF account. However, a couple of conditions must be met before availing this benefit. First, your PPF account must be active for three financial years. The second condition is that you can avail a loan against the PPF account only until the end of the sixth financial year.
A loan against a PPF account can be beneficial if you fit the aforementioned criteria and are looking for a short-term loan without pledging any collateral.
However, here are a few points that you need to keep in mind:
- You can only use 25% of the PPF account balance after the second financial year to avail the loan.
- The loan you get against your PPF account comes with an interest rate 1% higher than the one set by the government. For instance, if you wish to take a loan against your PPF investment today (August 2022), the interest charged will be 8.1%, as the PPF interest rate is 7.1%.
- Once the interest rate is set, it remains the same until you repay the loan.
- Also, you must repay the loan within 36 months from the month it was sanctioned.
- You can repay the entire amount in a single lump sum deposit or two or more monthly deposits over the next three years (36 months)
- Suppose you cannot repay the loan or have made partial payments within 36 months, in that case, the government will charge you 6% interest per annum. The interest calculation will consider the period starting on the first day of the month immediately after the month in which the loan was sanctioned to the last day of the month in which you make the complete payment.
Let us simplify this through an example: If you avail a loan against your PPF account in August 2022, you will have until July 31st, 2025 to fully repay the same. If you are unable to do so, you will incur a 6% interest rate per annum starting September 1st 2022 to the last day of the month in which you finally repay the loan amount.
- You can only take one loan against the PPF account balance in a financial year. Even if you repay the loan within the same financial year, you will not be allowed to take an additional loan.
5. Partial withdrawal
You can make a partial withdrawal from your PPF account if you are undergoing any financial crunch. It is among the prominent benefits of PPF that can help you to ease your financial burden through your savings instead of taking a loan.
As a PPF account holder, you can only make one partial withdrawal after completing five years. So, if you opened an account in April 2020, you can make a partial withdrawal in the financial year 2025-26. Please note that you are only allowed to make one partial withdrawal in a financial year.
According to the 2019 PPF Account Regulations, the maximum amount that can be availed in a financial year is lower than:
- 50% of the total balance at the end of the fourth year preceding the current one or,
- 50% of the overall balance at the end of the financial year preceding the current one
Also, suppose you have availed a loan against the PPF account. In that case, you must fully repay the loan before submitting the partial withdrawal request.
The withdrawn amount does not incur any income tax.
6. Premature closing of the PPF account
The government allows you to prematurely close your PPF account. However, you can only do so if your PPF account is at least five years old. There are certain conditions under which you can opt to close the PPF account prematurely. Premature closure of PPF account is allowed:
- to treat a life-threatening disorder of the account holder (you), spouse, children, or parents.
- for funding your child’s higher education.
- if your residence status changes. NRIs are not allowed to have a PPF account.
Features of PPF Account
After learning about the benefits of a PPF account, let us understand the key features of the same:
- Investment tenure: The minimum investment tenure in the Public Provident Fund Scheme is 15 years. You can extend it in blocks of five years as per your need.
- Limit on deposits: You can invest a minimum of Rs.500 and a maximum of Rs.1.5 lakh in a given financial year. You can do so in 12 instalments or a lump sum deposit. Investment above the upper limit will not be considered for PPF’s tax benefit.
- Account opening and keeping it active: You can open a PPF account with a minimum amount of Rs.100. However, you must regularly deposit the amounts within the limits given above for 15 years to keep your account active.
- Risk: As mentioned earlier, the most significant benefit of PPF is its risk-free returns.
The benefits of PPF investment are numerous, as you have just seen. It is an efficient way to start saving and building a sizable corpus over a long period. Moreover, it is one of the safest investment instruments available to you. As you continue your wealth creation journey, you can use the PPF tax exemption benefit to reduce income tax and generate guaranteed returns.
FAQs about benefits of PPF
Can I extend the tenure of my PPF account?
Yes, you can extend the tenure of your PPF account after completing the mandatory 15 years. You can do so in blocks of five years after the end of your primary investment tenure.
Can I close my PPF account prematurely?
Yes, you can opt for the premature closure of the PPF account after five years. You can do so to treat any life-threatening illness, fund your child’s higher education, or if there’s a change in your residence status. You must submit all the relevant documentation and proof for the first two conditions to prematurely close the PPF account. You will get an interest rate of 1% lower than the prevailing one at the time of such closure.
Is it mandatory to withdraw funds from my PPF account after 15 years?
No, it is not mandatory to withdraw funds after you complete the initial 15 years of investment. You can either choose to extend the tenure or keep accruing interest on the balance until you decide to withdraw the corpus.
How many times am I allowed to extend the tenure after 15 years?
There is no cap on extending the investment tenure as long as you are doing it in blocks of five years. However, you can extend the tenure only after the first five-year period matures.
How do I check the current rate of interest for my PPF account?
The government of India reviews, updates, and publishes the interest rate for the PPF scheme each quarter of the financial year. You can view the circular published by the Ministry of Finance to check the latest interest rate on the PPF account.