Public Provident Fund

 

 WHAT IS PUBLIC PROVIDENT FUND (PPF)? 

PUBLIC PROVIDENT FUND (PPF) is a debt-oriented product promoted by the government of India. It is one of the safest and the most tax-efficient investment options that offer modest but assured returns.

Every individual must have this product in their debt investment kitty. The entire amount invested up to Rs. 1,50,000/- per annum is tax-deductible under section 80C and the maturity proceeds are 100% tax-free. One can start this investment with as low as Rs. 500/- per annum and can further contribute in multiples of Rs. 50/- up to a maximum of Rs. 1,50,000/- per annum.

It has the longest lock-in period of 15 years and can be extended in blocks of five years thereafter.

 

 

IMPORTANT POINTS TO NOTE ABOUT PUBLIC PROVIDENT FUND (PPF)

The following are some of the important features of PUBLIC PROVIDENT FUND that every investor must know.

1. Investor’s profile – Due to long lock-in, it is best suited to young investors up to the age of 45 as they can stay invested until retirement and diversify their investment portfolio to create a retirement fund.

 

2. Risk – PUBLIC PROVIDENT FUND (PPF) is a government scheme and is considered to be the safest of all investments as it invests all its assets in safe instruments to offer higher stability. Due to this, it involves a negligible risk of default and interest rate fluctuations.

 

3. Liquidity – PUBLIC PROVIDENT FUND (PPF) is highly illiquid as it involves 15 years lock-in period. Hence, accessing funds to manage short term liquidity needs and emergencies is not possible since the premature withdrawal is also subject to several conditions. A loan against PPF is also available.

 

4. Taxation – Investment proceeds received on maturity is tax-free. Also, the amount invested is eligible for tax benefit under section 80C.

 

5. Volatile – PUBLIC PROVIDENT FUND (PPF) involves minimum volatility since most of its assets are invested in government securities and AAA-rated corporate bonds.

 

6. Time horizon – It is most suited to long term investors having an investment horizon of 15 years or more.

 

7. Regular Income – PUBLIC PROVIDENT FUND (PPF) does not provide any regular income as the interest earned gets accrued and paid with the principal on maturity.

 

8. Returns – PUBLIC PROVIDENT FUND (PPF) offers fixed returns in the range of 7% to 9% per annum in the form of interest which is 100% tax-free.

 

9. Asset class – PUBLIC PROVIDENT FUND (PPF) is a debt product as the major portion of its assets is invested in debt instruments. A small portion of PPF is also invested in equities nowadays to boost returns however, the proportion is too small to make a significant impact.

 

10. Cost – PUBLIC PROVIDENT FUND (PPF) does not involve any cost of investment except penalties for not making minimum contributions every year.

 

11. Loan facility – Loan against PPF is available from the 3^rd year of opening your account till the end of the 6^th year.

 

 

WHO CAN INVEST IN PUBLIC PROVIDENT FUND (PPF)?

1. Only individual residents above 18 years old can open a PUBLIC PROVIDENT FUND (PPF) account. If an individual attains an NRI status anytime during the year, then the PPF account will be closed and the interest accrued from that day until the maturity will be restricted to post office savings account interest of 4% only. However, they cannot make further contributions.

 

2. NRI, HUF or business entities cannot open a PPF account.

 

3. Minors are allowed to open a PUBLIC PROVIDENT FUND (PPF) acct with either a mother or a father as a guardian. In case, where parents have died, grandparents or court-appointed guardian can be a guardian.

 

4. Joint ownership is not allowed.

 

5. A resident turned NRI cannot extend the tenure beyond 15 years.

 

6. A grandfather or grandmother cannot open a PUBLIC PROVIDENT FUND (PPF) account on behalf of their grandchild except in cases where both the parents have died.

 

7. A person cannot open more than one account in his/her name. However, a separate account can be opened on behalf of a minor where the joint contribution limit will remain up to 1,50,000/- per annum only.

 

 

MINIMUM AND MAXIMUM INVESTMENT ALLOWED IN PUBLIC PROVIDENT FUND (PPF)

A PUBLIC PROVIDENT FUND (PPF) account can be opened with as low as 100/- and can be increased in multiples of 50/-. However, the minimum investment required to keep the account operative is 500/- per annum which can go up to the maximum of Rs. 1,50,000/- a year (Jointly between self and the minor).

If the minimum investment of 500/- per annum is not maintained, the account will be considered as “Inactive”.

Once the account becomes inactive, the subscriber becomes ineligible for loans and premature withdrawal facilities. Also, no interest will be earned during the year(s) the account remains inactive. Once the account is revived, interest will be calculated on the balance held at the time of revival.

 However, the account can be regularized by making a written request to the bank/post office where you hold a PUBLIC PROVIDENT FUND (PPF) account and by clearing all arrears plus 50/- penalty for each year the account was in default. E.g. If you have contributed 200/- in the 1^st year, 1,000/- in the 2^nd year and 400/- in the 3^rd year, you need to clear arrears of 400/- (300/- for the 1^st year and 100/- for the 3^rd year) along with 100/- as penalty for the 1^st and the 3^rd year and regularize the account.

The maximum amount permissible for an individual, across all accounts (including self and minor) is 1,50,000/- per annum only. Beyond that one cannot invest. Even if you invest anything more than that, then any excess amount will neither earn any interest nor will it give you any additional tax benefits.

Earlier, the number of deposits was restricted to 12 times in a year but now there is no limit. Also, the account opened for minors will be treated as a separate account.

 

 

WHERE DOES PUBLIC PROVIDENT FUND (PPF) INVEST YOUR MONEY?

Due to its conservative nature, the PPF Board primarily used to invest all the investor’s money in fixed return instruments like government securities, government and corporate bonds, etc.

However, due to its inability to beat inflation and to boost its overall returns on investment, the board has approved to invest a small portion of its assets i.e. up to 15% in equities in the form of mutual funds, IPOs and direct equities. However, your investment is still safe as it continues to remain a debt product. The equity exposure is small enough to make any major impact positively or negatively.

 

 

WHAT KIND OF RETURNS CAN PUBLIC PROVIDENT FUND (PPF) GENERATE?

If invested Rs. 10,000/- per month until retirement (60 years) @ average rate of 7% per annum, the corpus you will create (approximately) on your retirement i.e. at the age of 60 at various age groups will be as follows:

 

HISTORICAL DATA OF RETURNS IT GENERATED ANNUALLY

 

 

FUND ACCESSIBILITY AND LOCK-IN APPLICABLE FOR PUBLIC PROVIDENT FUND (PPF)

PUBLIC PROVIDENT FUND (PPF) has a minimum of 15 years lock-in starting from the end of the financial year in which the account was opened. Let's say you made your first contribution on July 26, 2014. The lock-in of 15 years will start from March 31, 2015, and the year of maturity, in this case, will be April 1, 2030.

However, it can be extended in a block of 5 years so the lock-in also gets extended to 20 years.

 

WHAT HAPPENS AFTER 15 YEARS?

After 15 years, the investor can choose any of the below 3 options:

A. Complete withdrawal – In this case, the entire corpus is paid to the investor and the account stands closed.

B. Extend the PPF account with no further contribution – PUBLIC PROVIDENT FUND (PPF) account can be extended after the completion of 15 years where the subscriber doesn’t need to put any amount after the maturity. This is the default option, meaning if the subscriber doesn't take any action within one year of his PPF account maturity, this option activates automatically. Any amount can be withdrawn from the PPF account if the option of extension with no contribution is chosen. The only restriction is only one withdrawal is permitted in a financial year. The rest of the amount keeps earning interest.

C. Extend the PPF account with contribution – With this option, the subscriber can contribute more in his PPF account after extension. If the subscriber wants to choose this option then he needs to submit Form H to the bank where he is having a PPF account within one year from the date of maturity (before the completion of 16 years in PPF). With this option, subscribers can only withdraw a maximum of 60% of his PPF corpus (amount which was there in the PPF account at the beginning of the extended period) within the entire 5 yrs block. Every year only a single withdrawal is permitted.

 

PARTIAL WITHDRAWAL

In case of severe cash crunch, a PF subscriber can request partial withdrawal of funds provided below conditions are satisfied.

 Withdrawals can only happen from the 7^th year onwards and only once a year.

The maximum amount of withdrawal can be 50% of the balance available at the end of the fourth year immediately preceding the year of withdrawal OR 50% of the balance at the end of the preceding year whichever is lower.

For instance, if your PPF account was opened during the financial year 2011-12 and if you make a premature withdrawal request during FY 2017-18, then the amount you are eligible will be calculated as:

 

PREMATURE CLOSURE

You may face a situation where you may not be able to continue with further contributions to your PUBLIC PROVIDENT FUND (PPF) account or may want to make withdrawals. Earlier, the PPF account could not be closed before the end of 15 years however, after satisfying certain conditions, you can now close your PPF account after 5 years. The specified conditions are as follows:

1. The account should have completed at least 5 financial years.

2. The amount is required for the treatment of a serious ailment or a life-threatening disease of the account holder, spouse or dependent children or parents. For this, the subscriber needs to provide supporting documents from the competent medical authority.

3. The amount is required for the higher education of the account holder or the minor account holder then, on the production of such documents and fee receipts confirming the admission in a recognized institute of higher education in India or abroad. In this situation, premature closure of the PPF account is allowed.

4. On a change in residency status of the account holder on production of the passport photocopy and visa or income tax returns.

However, it should be noted that there will be a premature withdrawal penalty of 1% which means in case, you opt to break the deposit midway, you will earn 1% less interest than what you would have earned otherwise. This can be explained in a table below:

 

IN THE EVENT OF DEATH

In the event of the death of the PPF account holder, the balance amount in the PPF account will be paid even before the completion of 15 years to the nominee or legal heir of the deceased person. The nominee or the legal heir is not allowed to continue the PPF account by making fresh contributions to it.

 

LOAN AGAINST PUBLIC PROVIDENT FUND (PPF)

• You can take a loan against the PPF from the 3^rd year of opening the account until the end of the 6^th year. So, if the account is opened during the financial year 2009-10, the first loan can be taken during the financial year 2011-12.

• You can avail a loan amount of up to a maximum of 25% of the balance in your account at the end of the second year immediately preceding the year in which the loan is applied for.

• The loan must be repaid in a maximum of 36 EMIs.

• Interest payable on PPF loans is 2% more than the interest earned during that year. If the loan is not repaid on time, the differential rate of 2% will increase to 6% per annum from the year of default.

• You can take a second loan against your PPF account before the end of your 6^th financial year, but your second loan can be taken only once your first loan is fully settled.

• A loan can be taken only once in a year even though the loan taken in the year is repaid in the same year.

 

 

WHAT ARE THE BENEFITS OF INVESTING IN PUBLIC PROVIDENT FUND (PPF)?

PUBLIC PROVIDENT FUND (PPF) offers the following benefits to its investors.

1. Cannot be attached – The balance amount in the PUBLIC PROVIDENT FUND (PPF) account is not subject to attachment under any order or decree of a court in respect of any debt or liability, but it can be attached by the income tax and estate duty authorities. Hence, it ensures a higher level of financial security for investors and their families.

 

2. Protection from market volatility – Since PUBLIC PROVIDENT FUND (PPF) is a debt instrument, it provides a fixed return on investment that keeps you protected from market volatility.

 

3. Save Tax – PUBLIC PROVIDENT FUND (PPF) will not only help you accumulate wealth for long term goals but also help you save tax under section 80C.

 

4. Safe – Since PPF enjoys a sovereign guarantee from the government, it is the safest option with guaranteed returns and carries zero risk of principal loss.

 

5. Superior returns – Fixed returns of above 8% is a very good proposition as compared to FD or any other debt instrument.

 

6. Low investment amount – One can start investing in PPF with as low as Rs. 500/- a year.

 

 

WHAT ARE THE LIMITATIONS OF INVESTING IN PUBLIC PROVIDENT FUND (PPF)?

PUBLIC PROVIDENT FUND (PPF) has the following limitations.

1. Lock-in: 15 years lock-in make PUBLIC PROVIDENT FUND (PPF) highly inaccessible in case of financial emergencies. Though partial withdrawal and premature closure is allowed, it is subject to several conditions.

 

2. Limited returns on investment: Inspite of being invested for 15 years, it fails to generate double-digit returns due to very low participation in equity. ELSS funds on the other hand can generate much better returns given the time frame with comparatively much fewer restrictions.

 

3. Loss of opportunity during the market boom: The objective of PUBLIC PROVIDENT FUND (PPF) is to offer a fixed return on investment to its investors due to which its exposure to equities is restricted. This prevents its investors to benefit from the upswing during the market boom.

 

 

WHO SHOULD CONSIDER INVESTING IN PUBLIC PROVIDENT FUND (PPF)?

PUBLIC PROVIDENT FUND (PPF) is most suited to the following investors:

1. Risk-averse investors – Since PUBLIC PROVIDENT FUND (PPF) is one of the fixed income products and offers assured returns, it is best suited to no-risk-takers who are ready to compromise on returns but not on safety.

 

2. Investors with low debt exposure – PUBLIC PROVIDENT FUND (PPF) is a debt product hence, investors with high equity exposure looking forward to creating a debt portfolio can consider this option. It can be a very good option for them to diversify and create a retirement corpus.

 

3. High net income individuals – Interest earned from the PPF account is 100% tax-free. Hence, it works best for investors who fall under the higher tax slab of 20% or more and want to earn tax-free interest.

 

4. Long term investors looking for diversifying their portfolio – PUBLIC PROVIDENT FUND (PPF) is a must-have product for all investors having an investment horizon of more than 15 years.

PPF offers a guaranteed and tax-free returns of 7% to 8% with the minimum risk of volatility, interest rate fluctuations and market movements. Since it is backed by the government, it also involves zero risk of default. Investors with low liquidity needs and having enough exposure to equities can invest in PPF for diversifying their portfolio and earn decent post-tax returns.

 

5. Investors looking for tax saving options – Apart from giving decent tax-free returns, PUBLIC PROVIDENT FUND (PPF) also offers a tax benefit to all its investors up to Rs. 1,50,000/- per annum under section 80C. Individuals who want to invest to create a retirement corpus and at the same time, save tax can consider investing in PPF.

 

6. Investors looking for guaranteed returns – Investors looking for pre-defined and guaranteed returns and can stay invested for at least 15 years must consider investing in PPF.

 

7. Investors with low liquidity requirements – PUBLIC PROVIDENT FUND (PPF) can generate much better post-tax returns as compared to other debt-oriented investments. Hence, investors who do not foresee any need to liquidate their investment can invest in PPF since it involves a 15 years lock-in.

 

 

WHO SHOULD AVOID INVESTING IN PUBLIC PROVIDENT FUND (PPF)?

PUBLIC PROVIDENT FUND (PPF) may not be the best investment for the following investors:

1. High-risk-takers – PUBLIC PROVIDENT FUND (PPF) is a low risk-low returns investment. Young investors especially below 35 years of age, who have age by their side and can take higher risk to earn much better returns by investing in equity mutual funds or direct equities.

 

2. Investors with short term liquidity needs – PUBLIC PROVIDENT FUND (PPF) has a 15 years lock-in and is strictly not advisable for investors having any short term fund requirements. Though partial withdrawal is permissible, it involves quite a few conditions.

 

3. Investors looking for regular income – PUBLIC PROVIDENT FUND (PPF) does not generate regular income for its investors. All the interest earned is accrued and paid upon maturity.

 

 

A PIECE OF ADVICE

THINGS YOU SHOULD DO WHILE INVESTING IN PUBLIC PROVIDENT FUND (PPF)

PUBLIC PROVIDENT FUND (PPF) investors must follow the below suggestions while investing to maximize the value of their investment.

1. Open the account before the end of the financial year – Ensure that you start your contribution before the end of the financial year as the 15 years lock-in is calculated from the end of the financial year in which the first deposit was made. Let us understand this with the help of the below examples.

1^st instance - Date of 1^st investment:  2^nd April 2018

                     Date of maturity: 1^st April 2033

 

2^nd instance - Date of 1^st investment:  25^th March 2018

                                      Date of maturity: 1^st April 2032

       So, the above illustration clearly explains that a difference of just 7 days can reduce your maturity date by 1 year.

 

2. Make monthly contributions before the 5^th of every month – For monthly interest calculation, the balance on the end of the 5^th day is compared with the balance on the last day of every month, and the one with lower balance will be considered for calculation.

E.g. Mr. A gets a salary on the 10^th and invests 10,000/- in PPF on the 12^th of each month. On the other hand, Mr. B gets paid on the 1^st and contributes 10,000/- in PPF account on the 3^rd of each month. Assuming, both have the same opening balance of 90,000/- in that month, Mr. B will earn interest on 1,00,000/- whereas Mr. A will be on the losing end and will earn interest only on 90,000/-.

Hence, one should always invest on or before the 5^th of every month.  And in case of lump sum investment, invest before the 5^th April to get the maximum benefit from it.

 

3. Diversify your investments – Returns from the PUBLIC PROVIDENT FUND (PPF) are fixed, not linked to the market and may or may not be able to beat inflation year on year consistently. Hence, instead of investing all your money in this product, you can also consider diversifying your investment in other market-linked products like balanced mutual funds or bonds issued by the Government of India.

 

4. Understand the product and the risk involved – PUBLIC PROVIDENT FUND (PPF) involves 15 years of lock-in. Hence, investors should be aware of all pros and cons of the investment they are getting into. The amount required on maturity, liquidity needs, risk appetite, etc. should be carefully evaluated before signing up for this scheme.

 

5. Know your investment goal – PUBLIC PROVIDENT FUND (PPF) is only meant for long term goals having a time horizon of at least 15 years or more. It should be dedicated to goals like retirement and legacy planning.

 

6. Update nomination details – Updating nominee details at the time of opening the account is very important. In case of an investor’s death, the family members should not end up running from pillar to post when they need that money the most to claim your investment proceeds.

 

 

THINGS YOU SHOULD AVOID DOING WHILE INVESTING IN PUBLIC PROVIDENT FUND (PPF)

PUBLIC PROVIDENT FUND (PPF) investors must avoid taking the following actions while investing to protect their investment from losing its value.

1. You can foresee the need for funds before maturity and still investing – PUBLIC PROVIDENT FUND (PPF) can only be liquidated after the maturity of 15 years. Hence, anyone looking forward to liquidating their investment before the maturity date may not be able to do so. Hence, revisit your short term fund requirements before signing up for this scheme.

 

2. Not making the minimum investment every year – Minimum investment of 500/- per annum is required year on year to keep the account active. Account getting inactive due to insufficient contribution will result in loss of interest and attract penalty to revive it.

 

3. Breaking it prematurely – Do not invest in PUBLIC PROVIDENT FUND (PPF) if you need the funds before 15 years lock-in. Breaking it prematurely will lead to penalties. Instead, one can explore loan options against PPF.

 

4. Do not get influenced by anyone but financial experts – A confused investor always has a tendency of reaching out to their friends and relatives for suggestions while making critical investment decisions. That happens irrespective of the knowledge and the level of understanding the friend has about the domain. It is as good as asking a truck driver, how to fly an airplane. Such advices in most cases are based on their individual experiences and hardly on calculations or facts and figures. Hence, instead of blindly following the financial advice of a random friend, investors must act wisely and take assistance of a well qualified financial planner who has sound knowledge about the domain.

 

 

WHAT ARE THE RISKS INVOLVED IN PUBLIC PROVIDENT FUND (PPF)?

PUBLIC PROVIDENT FUND (PPF) investors should be mindful of following risks involved in this investment:

1. Inflation Risk – Though PUBLIC PROVIDENT FUND (PPF) ensures the highest level of safety of principal and give assured returns, it may or may not be able to beat inflation year on year since it is not market-linked. The average rate of inflation is around 6% - 8% per annum whereas net returns generated from PPF can go below 8% or even lesser. This may lead to a shortfall when you look at the corpus you created in meeting your financial goals.

To reduce the risk, you can consider investing partially in through SIP.

 

2. Liquidity Risk – PUBLIC PROVIDENT FUND (PPF) can only be liquidated after 15 years on maturity. In case, someone needs to liquidate it before maturity, they need to break it prematurely which is subjected to a lot of conditions and also involves a penalty. Hence, anyone looking forward to liquidating their investment before maturity should consider investing in debt mutual funds or liquid funds.

 

 

TAXATION RULES FOR PUBLIC PROVIDENT FUND (PPF)

PUBLIC PROVIDENT FUND (PPF) is considered as one of the most tax-efficient investment options.

Under this scheme, the amount invested is tax-deductible under section 80C, the amount earned as interest and amount withdrawn is also tax-free.

 

 

DOES ANY OTHER PRODUCT OFFER BETTER PROSPECTS THAN PUBLIC PROVIDENT FUND (PPF)?

PUBLIC PROVIDENT FUND (PPF) can be beaten by the following products on various grounds.

1. From a safety point of view – PUBLIC PROVIDENT FUND (PPF) is supreme in terms of safety and is considered to be the safest than any other debt-oriented instrument as the returns it generates are fixed and there is no risk of principal loss as well since it is backed by the government.

 

2. From the returns point of view – Balanced mutual funds generate better returns than PPF as they also participate in the equity market.

Equity mutual funds, on the other hand, generate even better returns in the long run however, it carries a higher risk of principal loss as they invest directly in the stocks of various companies.

If someone has an even higher risk appetite is looking for even better returns then they can invest in stocks or IPOs of various companies.

 

3. From a liquidity point of view – PPF involves a pre-defined maturity period and breaking it prematurely attracts penalty. Hence, someone who is expecting any major expense soon can consider investing in liquid funds or ultra short term funds which not only generates better post-tax returns but also offer higher liquidity.

 

 

HOW TO START INVESTING?

The following process needs to be followed to open a PPF account.

• Fill up the form and attach required documents like Photo, Pan Card, Valid address proof like Aadhaar card, Passport, Driving License, Voter’s ID, Employer’s letter, Utility Bill, Rental/Lease Agreement, Bank Account Statements, Ration Card, etc.

• Submit the duly filled application and nomination form along with a set of documents to any nearby post office or designated bank. The list of banks that accept PPF applications are as follows.
  • State Bank of India
  • State Bank of Travancore
  • State Bank of Hyderabad
  • State Bank of Mysore
  • State Bank of Bikaner and Jaipur
  • State Bank of Patiala
  • Allahabad Bank
  • Bank of Baroda
  • Bank of India
  • Bank of Maharashtra
  • Canara Bank
  • Central Bank of India
  • Corporation Bank
  • Dena Bank
  • IDBI Bank
  • Indian Overseas Bank
  • Oriental Bank of Commerce
  • Punjab National Bank
  • Union Bank of India
  • United Bank of India
  • Andhra Bank
  • Vijaya Bank
  • Punjab and Sind Bank
  • UCO Bank
  • ICICI Bank
  • Axis Bank

It should be noted that one can also open a PPF account online on the website of a particular bank.

 

 

IMPORTANT TERMINOLOGIES

Various forms related to the PPF account.

• Form A – To open the PPF account
• Form B – To deposit or pay money into an account. It can be monthly deposits, repayment towards the loan taken against the account or the payment of penalties.
• Form C – To withdraw a partial amount from the account. This can be done 7 years after opening the account.
• Form D – To request for loan against your PPF account, offered from 3rd year to 6th year.
• Form E – To nominate one (or more than one) nominee for your PPF account.
• Form F – To cancel or make changes in nominations for the PPF account
• Form G – To claim funds by the nominee, in case the account holder dies. Along with this form, the death certificate has to be enclosed.
• Form H – To extend the maturity period beyond 15 years to further 5 years.