Introduction
Public Provident Fund (PPF) was first introduced in the year 1968, which has been overridden by new PPF scheme 2019. PPF scheme is considered as safest, lucrative investment and tax saving avenue though investment amount ceiling of Rs 150,000/- exists. PPF scheme falls under Exempt, Exempt, Exempt (EEE) category which mean tax deduction is available at the time of investment, interest earned on PPF deposits is tax-free in the hands of investor and maturity proceeds will also be tax-free in the hands of investor.
Eligibility
Individuals, Natural/appointed Guardian in the name of minors. Only one PPF account could be opened in the n/o individuals. NRIs are not allowed to open PPF accounts. A resident when becomes non-resident subsequent to opening the PPF account then account will be deemed to be closed and interest would be payable at Post Office savings rate from that date till the last day of the preceding month when account is actually closed.
Deposits, Interest and Loans
Initial deposit shall be Rs 500/- at the time of opening account. Every year minimum deposit amount shall be Rs 500/- in multiples of Rs 500/-. Maximum deposit shall continue to be capped at Rs 150,000/- in a financial year.
Interest payable of deposits for forthcoming quarter shall be notified by GoI at the end of every quarter. The current interest rate is 7.1% p.a., payable at the end of the year. The interest would be payable on the lowest balance at the close of 5th day and last day of respective month.
An accountholder is eligible for loan for a period of maximum 36 months on completion of 2 years and before expiry of 5 years from the opening of the account. The quantum of loan shall not exceed 25% of the balances standing to the credit of PPF account immediately preceding the year when loan is applied for. While accountholder can avail only one loan during a financial year but fresh loan is not allowed during the currency of existing loan. Repayment could be made in lump sum or in installments. If the principal loan amount is paid in lump sum then interest @1% p.a. would be payable in 2 monthly instalments. If loan is repaid in instalments then interest payable would be 6% p.a. If the interest is not paid within 36bmonths then interest amount would be debited to PPF account.
Maturity Proceeds, Withdrawal and Extension
Withdrawals are permitted only after completion of 5 years from the end of the financial year during which account was opened. Withdrawals would be restricted to 50% of the balance standing to the credit at the end of fourth year immediately preceding year of withdrawal or at the end of preceding year, whichever is lower. Withdrawal facility may be availed only once in a year and loan outstanding, if any, has to be adjusted before withdrawal. Premature closure is allowed after 5 years for specified purposes only or when residency status gets changed. In case of premature closure, interest rate payable would be 1% less than applicable rate from time to time.
Extension of PPF account is possible on completion of original period of 15 years when extension is permitted in block period of 5 years. The option of extension must be exercised at least one year before maturity of account or expiry of extended block period of 5 years. During extended period 60% of deposit could be withdrawn which was standing to the credit before commencement of extension period. PPF account could be closed anytime after the end of original 15 years period or on completion of extended block period of 5 years.
Returns Analysis
The interest rate of 7.1% payable presently has to be seen in the overall interest rate scenario and is relative in nature. The interest payable on PPF is tax exempt whereas other deposit instruments interest (currently between 5.5% and 6.5% p.a.) is taxable at marginal tax rate on individuals. While interest rate payable when PPF scheme started in 1968, was just 4.8% p.a. that was lowest in 53 years whereas maximum rate of interest was 12% p.a. for a long period from 1st April 1986 to 14th January 2000. Therefore, interest rate payable on PPF deposits has to be seen in relate sense, rather than absolute. Every year up to Rs 150,000/- of deposit in PPF account starting from the age of 30 years could result in sizeable corpus at the age of retirement. Further, income deduction up to Rs 150,000/- is available under section 80C of Income Tax Act, 1961. In view of what is stated above, tax-free interest rate of 7.1% is equivalent to 10% plus or 9% p.a. when considered as taxable interest rate, which is certainly a lucrative one under present circumstances.
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