Public Provident Fund (PPF): Eligibility, Interest, Loans & Maturity

A PPF or Public Provident Fund is a savings scheme offered by the Government of India. The interest on the account is paid by the government of India and set every quarter. It is also tax-free. The applicable PPF interest rate for 1st October to 31st December 2018 (Q3 FY 2018-19) has been fixed at 8.0%. The interest rate for July – September 2018 was 7.6%. Here is a brief PPF interest rate history:

Quarter Q2, FY 19 Q1, FY 19 Q4, FY 18 Q3, FY 18
Interest Rate 7.6% 7.6% 7.6% 7.8%

Importance of Opening a PPF Account

  • The principal and interest in the PPF account are guaranteed by the Government.
  • Contributions to the account up to Rs 1.5 lakh per annum are tax free. Interest on the PPF account is also tax free.
  • Interest Rate for the PPF account is declared by the Government every quarter and is higher than FD rates of many banks in that period.
  • The PPF account is immune from attachment from any order or decree of any court under the Government Savings Banks Act, 1873.

How to open a PPF Account

PPF accounts can be opened a post office, nationalised banks and major private banks such as ICICI and Axis. In several banks like ICICI and Axis, you can open a PPF account online through net banking as well. 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. Some banks simply allow PPF entries to be viewed online instead of issuing a passbook.

Documents Needed:

  1. PPF account opening form (Form A), the same can be obtained from specified bank branches or can be downloaded online.
  2. ID proof
  3. Address proof
  4. Photograph of the account holder
  5. Nomination form

Eligibility Criteria for PPF

Any individual who is a resident of India can open a PPF account. PPF accounts can also be opened by parents for their minor children. NRIs cannot open PPF accounts. However a resident Indian who has become an NRI after opening a PPF account can continue the account till maturity. Opening of joint accounts and multiple account is not allowed.

Minimum and Maximum Contribution

The minimum annual contribution is Rs 500 and the maximum is Rs 1.5 lakh. The maximum limit applies to contributions made by a person for himself and for a minor child. There can be a maximum of 12 contributions in a year.

PPF Interest

PPF is a fixed income investment. The interest rate on PPF account is notified by central government every quarter.

Read here : PPF Interest Rates

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.

PPF Tenure

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 maturity, you can extend the PPF account indefinitely in blocks of 5 years at a time.

Nomination Rules for PPF

Nomination can be made in favour of one or more persons. 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. Form E is used to add a nominee to the PPF account. Nomination can be made at any time during the tenure of account. Change, cancellation or alteration in nomination can be done through Form F. Nomination forms need to be signed by the account holder and two witnesses. Signature of the nominees is not required. The form can be submitted at the appropriate bank/post office branch.

Taxability & Exemption

Public Provident Fund falls under EEE regime of taxation, i.e. Exempt-exempt-exempt. Contribution to PPF account (up to Rs 1.5 lakh per annum) is eligible for deduction under section 80C of Income Tax Act, interest earned is exempted and maturity proceeds are also exempted from tax. The interest earned on the PPF account must be mentioned on the income tax return.

Attachment Immunity

The PPF Account was earlier governed by the Public Provident Fund Act, 1968 which protected the PPF Account from attachment by any court. Budget 2018 repealed the PPF Act and brought the PPF Account under the Government Savings Banks Act, 1873. An amendment to the Finance Bill, 2018 added protection against attachment in the Government Savings Banks Act as well. The PPF Account cannot be attached under any order or decree of any court for any debt or liability under the Government Savings Banks Act, 1873. This protects account holders against all creditors, including the income tax department.

Loan Against PPF

The facility to avail loan against the PPF account is available from 3rd financial year up to 6th financial year from the date of account opening. 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 (FY 2011-12), the end of the financial year in which the account was opened is Mar 31, 2012. The loan can be taken from 1st April, 2013 (FY 2013 – 14) onwards. Five years from the end of the financial year in which account was opened is March 31, 2018 (FY 2017 – 18). Thus, the loan can be obtained from Mar 31, 2013 to Mar 31, 2018. The maximum tenure of such a loan is 36 months

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 interest is not paid with the principal amount in EMIs. 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.

Revival of inactive Account

The PPF Account becomes inactive if the minimum contribution of Rs 500 per year is not made:

  1. A written request to reactivate the account has to be submitted at the post office or bank branch where the account is based
  2. A fine of INR 50 for each year the account has been inactive has to be paid.
  3. Arrears of minimum amount of INR 500 for all the years the account has been inactive have to be paid.

Transfer of PPF Account

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.

Partial Withdrawal

Partial withdrawals can be made after the expiry of 5 years after the year in which the account is opened. Example, if the account was opened on Jan 1, 2012 withdrawal can be made from financial year 2019-20 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 :

  1. 50% of the account balance as at the end of the financial year, preceding the current year, or
  2. 50% of the account balance as at the end of the 4th financial year, preceding the current year.

In the above example, if partial withdrawal has to be made on April 1, 2017 the maximum amount that can be availed as loan would be lower of:

  1. 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)
  2. 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 Closure

Pre-mature closure of PPF account is not permitted within 5 years of opening the account. Thereafter it can only be closed on specific grounds such as life-threatening ailments affecting the account holder, spouse, dependent children or parents. Supporting medical documents have to be produced to support a claim on these grounds.

Death of Account Holder

In case of death of PPF account holder, the proceeds of PPF account can be claimed by the nominees/ legal heirs. 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:

  1. In case where the account holder has made nomination
    1. Form G filled by all the nominees
    2. Death certificate of the account holder
    3. Passbook of the subscriber
  2. In case where nomination is not made by account holder and claim is supported by legal evidence
    1. Form G filled by legal heirs
    2. Death certificate of the account holder
    3. Succession Certificate, Letter of Administration or attested copy of the will
    4. Passbook of the subscriber
  3. In case where nomination is not made by account holder and claim amount is less than INR 1 Lakh
    1. Form G filled by legal heirs
    2. Death certificate of the account holder
    3. Annexure I to Form G (Letter of Indemnity) on stamped paper
    4. Annexure II to Form G (Affidavit) on stamped paper
    5. Annexure III to Form G (Letter of Disclaimer on Affidavit) on stamped paper

Maturity of PPF Account

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:

  1. 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.
  2. Extension of PPF with contribution: A subscriber can extend the life of the PPF account indefinitely in blocks of 5 years at a time.  The subscriber has to submit a request to extend the account, with further contributions by submitting Form H. The choice of extension with contribution has to be made within one year from the date of maturity, otherwise the default choice of extension without further contribution applies. Once the account is extend with contributions, maximum 60% of the balance as on the date of extension of the account can be withdrawn. This amount can be withdrawn in one go or can be spread over several years. A maximum of one withdrawal can be made in a year.
  3. Extension of PPF without further contribution: In case if no choice is made, then the default choice, .i.e. extension without further contribution applies. You do not need to fill any form to choose this option. A maximum of one withdrawal is allowed per year and any amount up to the total balance in the account can be withdrawn.

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.