At the end of every month there is certain amount left out of the monthly income which has not been spent. This amount is known as savings. Everyone has different ways of keeping their savings aside, some prefer keeping the cash or depositing it in savings bank account and others might prefer investing it in a manner so as to earn returns as increase their wealth. There are various avenues available to invest such as fixed deposits, NSC, etc. One of the preferable options available is to invest in Public Provident Fund or PPF.
Public Provident Fund is a tax saving instrument offered by Government of India. PPF scheme is governed by the provisions of Public Provident Fund Act, 1968. The deposits made towards the PPF account can be claimed as deduction under Income Tax Act and the interest earned on these instruments is tax free. The history of these instruments goes back to 1968 when these were introduced by the National Savings Institute of the Ministry of Finance. The objective of this scheme is to mobilize small savings and encourage creation of retirement corpus. It is a risk free saving scheme as it is backed by the guarantee of the Central Government.
Public Provident Fund Account
PPF accounts can be opened with any post office. Other than Post Office, it can also be opened at specific public sector banks such as SBI, PNB, etc. or private sector banks such as ICICI, Axis bank, etc. Some of the benefits of PPF account are:
- There has been no major fluctuation in the interest rate in past one decade; it has been close to 8% p.a. Hence, it is a stable option for investment.
- Investment made, interest earned and maturity proceeds are all tax-free.
- It allows pre mature closure in order to meet genuine financial needs i.e. medical exigency or higher education.
Any individual who is a resident of India can open a PPF account. He can be salaried, self employed or belong to any other category. Either of the parents of a minor can open the account on behalf of minor.
Prior to May 13, 2005 Hindu Undivided Families were also allowed to open PPF accounts. Post the said date, subscription of PPF to HUFs has been stopped. The accounts that were subscribed prior to that date are valid till the maturity of the account. However, such subscription cannot be extended.
Since, the NRIs are not residents of India; they are not eligible for opening a PPF account. The resident Indian who has become an NRI after subscribing to the PPF account may continue the subscription till the initial maturity (or expiry of extension block of 5 years). However, such subscription cannot be extended beyond initial maturity of 15 years (or expiry of extension block of 5 years). Further, the subscription shall be on non repatriation basis. Funds can be transferred via cash, NRO account or net banking. Amount deposited after maturity shall be refunded to the depositor without any interest.
Only one account can be opened by one person i.e. multiple accounts are not permitted. In case, multiple accounts are opened then no interest will be payable on the other accounts opened and the same will have to be amalgamated with the first account. Also, opening of joint accounts is not allowed, .i.e. PPF account can be opened in the name of one person only. In case, the account is opened on behalf of minor, it can be in the name of either of the parents. Both parents cannot open different accounts under the name of the same minor child. Also, grand parents cannot open an account in the name of their minor grand children.
PPF account can be opened by visiting post office or specified nationalized bank branch. You can also open an account online via internet banking. Once the account is opened a pass book similar to the bank passbook is issued. All transactions such as subscription, interest, withdrawals, etc. are recorded in this passbook. This passbook is also required to claim the deduction under section 80C of Income tax Act.
Account opening by visiting post office or bank: To open PPF account, application form along with the required documents is to be submitted. An initial deposit has to be made to open the account.
- Online process for account opening: Accounts can be opened online by visiting bank’s official website. Every bank will have its own defined set of policies and procedure for the same. Users can save their time, effort and cost of travel by choosing to open an account online. Additional facilities such as accessing the account online, checking account statements, transacting funds and linking savings accounts are also being offered by many banks.
Form A is required to open a PPF account. It requires details about the account holder such as name, address, PAN card, etc. The amount being deposited also needs to be specified in the form. In case of minors, details such as the minor’s name, guardian’s name and relationship with the applicant is required. If an agent is opening an account the agent’s name has to be filled in. The form has to be signed by the account holder.
- PPF account opening form, the same can be obtained from specified bank branches or can be downloaded online.
- ID proof
- Address proof
- Photograph of the account holder
- Nomination form
PPF account can be opened with an authorized bank at its authorized branch only. Though the account is opened by the banks, it is governed by the provisions prescribed by government. PF can be transferred from one bank to another, provided the new branch is an authorized branch.
Since the scheme was introduced to promote savings, the minimum amount of deposit is very nominal. Depositor is required to make a minimum deposit of INR 500 every year. The maximum limit of deposit in any financial year is INR 1.5 Lakhs. Prior to Aug 2014, the maximum deposit limit in PPF account was INR 1 Lakh. Post the said date; the limit was increased to INR 1.5 lakhs. This limit can be changed by the government from time to time.
The maximum limit of INR 1.5 Lakhs is applicable to all the contributions made by a person, whether to his account or to the account of his minor child. In case, the spouse is also working, then total contribution can be of INR 3 Lakhs.
Example, if a person has two children he can be guardian in PPF accounts of one of them, while his spouse can be guardian in PPF account of the other child. Total contribution under his PPF account and PPF account of the first child shall not exceed INR 1.5 Lakhs per annum. Similarly, total contribution under spouse’s PPF account and PPF account of the second child cannot exceed INR 1.5 Lakhs.
In this case, since the spouse is a major, he cannot be a guardian in his spouse’s account. As per PPF norms, it is a separate account and the contribution to spouse’s PPF account can’t be considered while calculating total contribution to PPF account. So, he can deposit INR 1.5 Lakhs in his PPF account and INR 1.5 lakhs in his spouse’s PPF account. However, income tax benefit will be limited to INR 1.5 lakhs only. In case, the spouse is also working, income tax benefits up to INR 3 lakhs can be availed.
Form B is required to be submitted along with the amount to be deposited in PPF account. The amount can be in lump sum or in installments. There is no fixed amount of installment, i.e. the amount of deposit may vary from one installment to another. However, minimum amount of installment is INR 5. Also, there is no limit on no. of installments in a month but there can be a maximum of 12 installments in a year.
In case if one fails to make deposits in any year, the account becomes inactive. The account can be regularized only on payment of the required fees along with the arrears.
Form B is required to deposit or pay money into PPF account. The amount may be towards deposits in account, repayment of loan taken against the account or payment of penalties to reactivate an inactive account. The mode of payment has to be specified in the pay-in slip. In case accounts are opened and deposits are made through an agent, the agent’s name and code has to be entered in the form.
Deposits can be made via cash, cheque, DD or online transfer. In case, the payment is made by means of cheque or DD, the date of realization of the instrument will be considered as date of deposit. In case, the cheque or DD is deposited before March 31 but is realized after the said date, then same will be considered as deposited in the next financial year. Such amount can be claimed as deduction under Income Tax Act in the next financial year.
PPF is a fixed income investment. The interest rate on PPF account is notified by central government. Currently, the rate specified as notified by central government on October 1, 2016 is 8% p.a. compounded annually. Prior to the said date, the same was 8.1% ; effective since April 1, 2016. PPF interest is calculated monthly; however, the same is credited to the account at the year end. If the amount deposited in PPF account exceeds the specified limit (presently, INR 1.5 Lakhs), no interest is paid on the excess amount.
Interest on PPF is calculated monthly on the lowest balance between the close of the fifth day and the last day of every month, i.e. for the purpose of interest calculation, amount that is deposited into the account before 5th of the month is only considered. So if any money is deposited on 6th of a month, then no interest will be paid on that amount in the respective month. Hence it is advised that deposits should be made between 1st and 5th of the month to maximize the returns.
Example: If an account has a balance of INR 10,000 on Jan 1 and INR 1,000 is deposited on Jan 4, then interest will be paid on total amount of INR 11,000. However, if the said INR 1,000 is deposited on Jan 6, the interest will be calculated on INR 10,000 and not 11,000.
Even though PPF is a fixed income investment, the rate of return is not fixed as the same is notified by central government for every year. The rate notified by central government in last 6 years is as follows:
Interest Rate (p.a.)
2016 – 2017
2015 – 2016
2014 - 2015
2013 - 2014
2012 - 2013
2011 - 2012
For example, if the account was opened in the year 2011 - 2012, interest would have been calculated @ 8.6% p.a. for the first year, @ 8.8% p.a. for the second year (2012 - 2013), @ 8.7% p.a. for the third, fourth and fifth year (2013 - 2014, 2014 - 2015, 2015 - 2016).
PPF account matures after the expiry of 15 years from the end of the financial year in which account was opened. For example, if the PPF account was opened on Jan 1, 2010 it will mature on March 31, 2025, i.e. 15 years from March 31, 2015. At the time of maturity of PPF account, investor has two options:
- Withdrawal of PPF maturity amount along with the accumulated interest
- Extension of PPF account without further contribution
As per PPF Act, it is not mandatory to appoint a nominee for PPF account. However, it is advised to appoint nominees in order to avoid conflicts in case of death of account holder. Nomination can be done at the time of submitting the application for opening PPF account. Nomination can be made in favour of one or more persons. There is no prescribed limit for the number of people, i.e. any no. of people can be appointed as nominee. In case, more than one person is appointed as nominee, percentage share of each nominee also needs to be specified. Nominations cannot be made for minor’s PPF account. Anyone, i.e. parents, spouse, relatives, children, friends, etc. can be nominated.
The nominees shall be eligible to claim the proceeds of the account only in case of death of the account holder. In case of death of account holder, the nominee(s) shall be entitled to encash the maturity proceeds of the account or sub-divide the same between the individual nominees in prescribed ratio.
Form E is used to add a nominee to the PPF account. Nomination can be made at any time during the tenure of account. The details of the nominees, i.e. name, address and relation with the account holder need to be specified in the form. In case of multiple nominees, the percentage share of each nominee also needs to be specified.
In case, any change or alteration has to be done in the nomination already made, the same can be done through Form F. In case of multiple nominees, the percentage allocated to each nominee can also be changed. The same form is to be used to cancel the nomination. Nomination can be changed at any time during the tenure of the account.
The forms can be obtained from the bank/branch/post office where the account is opened. Apart from the required details, the form needs to be signed by the account holder and 2 witnesses. Signature of the nominees is not required. The form can be submitted at the respective branch/office. It should be ensured that the details of the nomination are updated in the passbook also.
PPF is long term investment option that can be used as a tax saving instrument by the investors. Public Provident Fund falls under EEE regime of taxation, i.e. Exempt-exempt-exempt. Contribution to PPF account is eligible for deduction under section 80C of Income Tax Act, interest earned is exempted and maturity proceeds are also exempted from tax. There are three instances of tax that may arise during the tenure of PPF account.
Investment in PPF account: Any contribution made by the account holder towards PPF account is exempted from tax. It includes the amount invested at the time of opening the account or the contributions made during the tenure of the account. The same can be claimed as a deduction from the taxable income of the account holder. Contributions made towards the account of minor child can also be claimed as deduction.
It is to be kept in mind that the maximum contribution that can be made by an investor in any year is INR 1.5 Lakhs. Similarly, the income tax also prescribed that, the maximum deduction that can be claimed under section 80C is INR 1.5 Lakhs. This limit includes other investments made by the investor under section 80C of Income Tax Act. Hence, the maximum deduction that can be claimed is INR 1.5 Lakhs.
- Interest earned on PPF account: The interest earned on PPF account is exempted from tax under section 10(11) of Income Tax Act.
- Amount received on maturity: Amounts withdrawn from PPF accounts or amount received on the maturity of the account is exempt from tax.
Hence, it is one of the best tax saving options available for the tax payers as one doesn’t have to pay any tax on the investment made or interest income earned.
The public Provident Fund account can also be used to obtain loan facility. This facility to avail loan against the PPF account is available from 3rd financial year up to 6th financial year. In another words, loan can be availed at any time after the expiry of one year from the end of the financial year in which the account was opened but before expiry of five years from the end of the financial year in which the account was opened.
For example, if the PF account is opened on Jan 1, 2012, the end of the financial year in which the account was opened is Mar 31, 2012. One year from the end of financial year in which the account was opened is Mar 31, 2013. Hence, the loan can be taken from Mar 31, 2013 onwards. 5 years from the end of the financial year in which account was opened is March 31, 2017. Thus, the loan can be obtained from Mar 31, 2013 to Mar 31, 2017.
Form D is required to be submitted to avail loan against the PPF account. Form requires details such as account number, amount being borrowed, etc along with the undertaking that the amount will be repaid with interest within three years.
The maximum amount of loan that can be availed against PPF accounts is 25% of the balance at the end of the 2nd financial year preceding the year in which the loan was applied for. In the above example, if the investor wants to take the loan in April 2013, the maximum loan that can be availed is 25% of the balance as on Mar 31, 2012.
The interest rate payable on loan taken against PPF account is 2% higher than the prevailing interest rate on PPF account. For example, if the prevailing interest rate of PPF account is 8%, then interest payable on loan taken on such account would be 10%. Prior to Nov 30, 2011, this rate was 1% higher than prevailing interest rate on PPF account. Hence, in case of loans taken prior to the said date, the interest charged would be 1% above the prevailing rate of PPF account.
The loan taken against PPF account can be repaid either in lump sum or in installments within the period of 36 months. The interest is not paid with the principal amount. Once the principal amount is fully repaid the interest has to be repaid within 2 months. In case the loan is not repaid within 36 months, interest at 6% more than the prevailing interest rate of PPF account is charged. Second loan can be obtained only after the closure of first loan.
In case the minimum amount is not deposited in the PPF account in any year, the account becomes inactive. The facility of pre mature withdrawal is not available on inactive account. Also, the account holder cannot avail loan against a PPF account which is inactive.
Such account can be reactivated on the payment of prescribed fees. Following is the process to reactivate an inactive account:
- A written request to reactivate the account has to be submitted at the post office or bank branch where the account is based
- Pay the fine of INR 50 for each year the account has been inactive. For e.g., if an account has been inactive for three years, fine of INR 150 (50*3) is to be paid.
- Deposit the arrears of minimum yearly deposit amount of INR 500 for all the years the account has been inactive. For example, if the account has been inactive for three years minimum deposit of INR 1500 (500*3) is to be paid. The deposit amount may exceed the limit but cannot be less than the minimum prescribed limit.
The account is activated only on the payment of the entire amount.
In case the account remains dormant till the maturity, the amount deposited in the account along with the interest accrued thereon is paid at the time of maturity. However, in this case also, the account has to be reinstated before claiming the maturity proceeds by paying the fine along with the arrears. Else, the proceeds of the account are blocked until it is reinstated.
The PPF account can be transferred from bank to post office or vice versa. It can also be transferred between different branches of the same bank. Following is the process of transferring the PPF account:
- An application for the transfer of PPF account has to be submitted at the branch at which the account was opened. Application form must have the essential details of the account such as account number, account holder’s name, address, etc.
- The post office or bank branch at which the account is created sends across all original documents like the certified copy of the account, account opening application, specimen signatures, nomination form, etc. to the bank branch or post office in which the new account has to be opened by the account holder.
- A cheque or demand draft (DD) of the outstanding balance in the PPF account at the time of transfer is also sent along with the documents.
- On receiving the documents and outstanding payment, the new branch starts with the account opening process.
- Most of the banks require the customer to submit a new PPF account opening form, nomination form, old passbook etc as a new account is opened. A copy of old passbook should be kept by the account holder before submitting the same. It helps in avoiding the conflicts that may arise in future.
- In addition to the application form, fresh KYC documents are also required to be submitted.
- New passbook is issued to the account holder in which balance of the previous account is shown as the credit.
- The account can be accessed by the account holder in the usual manner.
PPF accounts can be fully withdrawn on the maturity of 15 years from the date of opening of account. However, investors can withdraw partial amount to meet emergency requirement. Such partial withdrawal is subject to prescribed conditions. Pre mature withdrawals can be made from the start of 7th financial year after the account is opened. Example, if the account was opened on Jan 1, 2012 withdrawal can be made from financial year 2017-18 onwards. Only one partial withdrawal is allowed per financial year. The maximum amount that can be withdrawn per financial year is the lower of following:
- 50% of the account balance as at the end of the financial year, preceding the current year, or
- 50% of the account balance as at the end of the 4th financial year, preceding the current year.
In the above example, if pre mature withdrawal has to be made on April 1, 2017 the maximum amount that can be availed as loan would be lower of:
- 50% of the balance as on March 31, 2017 (current financial year is 2017 - 2018 hence financial year immediately preceding the current financial year is 2016 - 2017 which ends on March 31, 2017)
- 50% of the balance as on March 31, 2014 (current financial year is 2017 - 2018 hence 4th financial year immediately preceding the current financial year is 2013 - 2014 which ends on March 31, 2014)
Form C is required to be submitted to withdraw partial amount from the PPF account. Details such as account number, amount of money to be withdrawn, etc. is to me mentioned on the form. A declaration stating that no other amounts were withdrawn during the same financial year is also to be submitted. In case, the account is in the name of the minor, additional declaration stating that the amount is required for the use of minor child who is still a minor and is alive. Passbook is also required to be submitted along with the form.
Pre mature withdrawal of PPF account is not permitted. However in case of death of account holder, the nominees or legal heirs can close the account by submitting the required documents without paying any penalty. As per the rules, Ministry of Finance, has the authority to permit, in case the money is required for the treatment of a serious ailment or for paying the expenses of higher education.
In case the account holder wants to close the PPF account for the treatment of a life-threatening disease or a serious ailment, he can do so only for the treatment of family members. Family members include himself or herself, his/ her spouse, dependent children and dependent parents. In such case, supporting documents from the competent medical authority is required to be submitted.
In case the amount is required for paying the expenses of higher education, fee bills, documents confirming the admission to the college or university, and other supporting documents need to be submitted.
Pre mature withdrawal is permitted only in case where the account has been in operation for at least 5 years. In case of pre mature closure, penalty of 1% on the amount of interest payable is charged, i.e. interest on such account will be paid 1% less than the interest rate on such account. Such penalty will be charged from the date of opening of account till the date of pre mature closure. These provisions are not applicable in case of death of the account holder.
In case of death of PPF account holder, the proceeds of PPF account can be claimed by the nominees/ legal heirs. In case of multiple nominations, the proceeds will be paid as per the percentage specified in the nomination form. In order to claim the proceeds, the claimant should submit an application along with Form G. Form G requires information pertaining to the claim such as account number, nominee details, etc. Following documents are required to be submitted to claim the PPF account proceeds:
In case where the account holder has made nomination
- Form G filled by all the nominees
- Death certificate of the account holder
Passbook of the subscriber
In case where nomination is not made by account holder and claim is supported by legal evidence
- Form G filled by legal heirs
- Death certificate of the account holder
- Succession Certificate, Letter of Administration or attested copy of the will
Passbook of the subscriber
In case where nomination is not made by account holder and claim amount is less than INR 1 Lakh
- Form G filled by legal heirs
- Death certificate of the account holder
- Annexure I to Form G (Letter of Indemnity) on stamped paper
- Annexure II to Form G (Affidavit) on stamped paper
- Annexure III to Form G (Letter of Disclaimer on Affidavit) on stamped paper
A succession certificate is a certificate issued by civil court to legal heirs in case the deceased person has not made a will. The same can be obtained by submitting a petition to the civil court in whose jurisdiction the PPF account is opened. Death certificate also needs to be submitted along with the petition. The court issues a notification in newspapers for 45 days and if there are no contestants during that period, the succession certificate is issued to relevant applicants. In casethe amount of claim is less than INR 1 Lakh, succession certificate is not required.
The PPF account cannot be continued by the nominee/ legal heirs after the death of the account holder. The amount in the account continues to earn interest even after the death of the account holder till the time amount is claimed. However, the amount deposited in the account after the death of the account holder will not earn any interest and the same shall be refunded to the claimant along with the account proceeds. If any loan was taken on such PPF account, the same will be closed by deducting the amount from the proceeds payable to the claimant.
PPF account matures after a period of 15 years from the end of the financial year in which the account was opened. At the time of maturity, the account holder has three options:
Withdrawal of maturity amount: The account holder can withdraw the PPF amount along with the interest accrued thereon. The entire maturity proceeds are exempt from tax.
- Extension of PPF without further contribution: If the subscriber wishes to continue his subscription of PPF account beyond the period of 15 years he can do so by submitting Form H. At this stage, he has two options; first extension without further contribution and second extension with further contribution. The choice of extension with contribution or without contribution has to be made within one year from the date of maturity. In case if no choice is made, then the default choice, .i.e. extension without further contribution applies.
In this case, the tenure is extended for a block of 5 years. This option can be chosen any number of times. The withdrawal is permitted one a year and there is no limit on the amount of withdrawal. Hence, the amount can be fully withdrawn at any time during the extended period. Interest is payable on the balance amount of the account.
Extension of PPF with further contribution: As in case of extension without contribution, in this case also the tenure is extended for a block of 5 years. In this case, regular contributions have to be made to the PPF account. Maximum 60% of the balance as on the date of maturity can be withdrawn during the entire period of 5 years and maximum one withdrawal can be made in a year.
To extend the subscription beyond the period of 15 years, Form H has to be submitted. This form has to be submitted within the period of one year from the date of maturity. It is to be noted that once the PPF account is renewed with/without contribution, the option cannot be switched, i.e. from with contribution to without contribution or vice versa. In case the amount is deposited in the PPF account without choosing the correct option, no interest will be payable on such amount. Also, no deduction under Income tax Act will be available on such contribution.