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PPF (Public Provident Fund) Investment: Should You Invest Your Money?

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Public Provident Fund or PPF is a long term saving account with excellent tax benefits of up to 1.5lakhs per annum under Section 80C of the Income Tax Act. The primary objective of PPF is an intake of an annual amount from PPF account holders and returning some interest at the current rate. Monitored by the Central Government, a PPF account matures 15 years after its commencement. But there is a provision of an extension of an account for more than 1 blocks, where each block denotes 5 years.

PPF: All you need to know

Why Should You Invest In PPF?

Public Provident Fund is one of the safest long-term investment plans for citizens of India. It is monitored by the government and ensures excellent return rates (generally between 8 to 9 percent). The initial cost incurred to invest in PPF is very less (minimum INR 500) hence it can be availed by many. Also, it is liable to tax benefits under Section 80C of the Income Tax Act.

Rate Of Interest

The rate of Interest offered on PPF is almost constant. Each year the government revises this rate. Given below is a data sheet for the rates of Interest over the last 5 financial years.

 

FINANCIAL YEAR

CORRESPONDING RATE OF INTEREST

2012-2013

8.8%

2013-2014

8.7%

2014-2015

8.7%

2015-2016

8.7%

2016-2017

8.1%

How To Open A PPF Account

There are few eligibility criteria concerned with the opening of a PPF account. If an Indian citizen has fulfilled those criterions, a PPF account can be opened. The required documents need to be submitted while opening a PPF account. There are generally two methods of opening a PPF account

  • At Bank or Post Office
  • Via online portal

To get the complete details of opening a PPF account including the complete list of documents and eligibility criteria you can read more here: How To Open A Public Provident Fund Account

Maintaining A PPF Account

In order to maintain a PPF account till maturity, a contribution of minimum INR 500 has to be made each year to the account. If a PPF account is opened for a minor (less than 18 years), a guardian must oversee the proceedings related to the account. There is no upper limit for depositing money to a PPF account, though the minimum cannot fall below INR 500. Also, interest is calculated on amounts up to 1.5lakhs only. This investment amount can either be deposited as a lump sum or in 12 installments. A compounded interest on the deposited amount will be calculated and credited to the account holder annually. The rate of interest for the FY 2016-2017 is 8.10%.

PPF vs Other Plans

Before you decide whether to invest in PPF or not, compare it with other schemes and then decide:

PPF or Fixed Deposit

Depending on your age, liability, and other conditions, you may choose to invest in PPF or FD. To help you decide where to put your money in, I have written a detailed post on PPF vs Fixed deposits.

PPF or EFP

Between PPF and EPF, if you are confused about which investment is better for your, check out this article on PPF vs EPF.

PPF vs ELSS

If you are yet to decide which would be a better option in between PPF and ELSS, check out the detailed post on PPF vs ELSS

Alternatives To PPF

As per the above comparisons and studies conducted, there are several alternatives to opening a PPF account. These alternatives will ensure better financial gains plus the flexibility factor is greater. Here are following alternatives you can consider:

  • Equity Linked Savings Scheme type Mutual Funds
  • SIP (Systemic Investment Plan) Investments
  • Real Estate
  • Employees Provident Fund (For working citizens)

PPF FAQs:

Who should invest in Public Provident Fund?

PPF is one of the best investments if you are looking for long term savings and retirement options. Also, it is government monitored, so the risk factor is less. Thus an investor with low-risk appetite and long term financial return goals must invest here.

What are the better investment options?

ELSS Scheme of mutual funds is a better investment option as comparatively. It has a lock period of 3 years with higher returns and similar tax savings. But when it comes to matters of risk, PPF is a comparatively a low-risk scheme, as ELSS depends on private and market share values and PPF is government set scheme where returns are fixed. In terms of tax savings NPS is a better option, but in the long run, PPF is better in terms of flexibility.

 Can interest be earned on failure to maintain the account?

For each year that the account remains inactive, no interest is earned as the account is deactivated. In the case of revival of account, a compounded interest will be earned on the remaining balance.

Can joint accounts be held?

No, in the case of Public Provident Fund, joint accounts are not allowed. One person can open one account. However, there is a provision for a nomination.

Who can open an account for a minor?

Only parents and legal guardians are allowed to monitor an account opened for a minor. Grandparents are not allowed this provision.

How to calculate interests gained from a Public Provident Fund Account?

All investments made on or before 5th of a month is liable for interest calculation. For example, if you deposit INR 75,000 on 1st August and INR 75,000 on 15th August, then a compound interest will be calculated on INR 75,000 only.

Drawbacks Of PPF

Every scheme is subject to its own set of advantages and disadvantages. Similarly, as there are several advantages of a PPF account there are few disadvantages. An individual must be fully informed about the following drawbacks before proceeding to open a PPF account:

  • The maturity period of 15 years is too long a time period. Thus it is not easy to liquefy the monetary assets invested in PPF. Even in the case of premature withdrawal, the amount withdrawn is subject to various terms and conditions. Hence, the flexibility of lock-in period is very less.
  • Interests in PPF is calculated up to an investment of INR 1.5 Lakhs per annum. Thus anyone investing more than that amount at once is liable to definite losses.

Maturity Of PPF Account

The Public Provident Fund account holder has 3 options on the maturity of the account:

  • Completely withdrawing the lump sum generated on maturity. Thus a case where the investor has invested 1lakh per annum in PPF for 15 years, they will receive a lump sum of 30lakhs on maturity. Thus the return rate is high.
  • Extension of PPF Account Without Extra Deposit: After the maturity of the PPF, if has been extended for one block of years, then the subscriber may make deposits and withdrawals based on sole discretion. As to deposits, there are no conditions applied, but when it comes to withdrawal, only one withdrawal is allowed per financial year for an extended account. The remaining amount is annuitized.
  • Extension of PPF Account With Extra Deposit: After the maturity period an account holder can choose to deposit extra into the PPF account and extend it further. In this case, the account holder can withdraw 60% of the money in the account within one block of 5 years. Only one withdrawal can be made annually.

Lock-In Period And Withdrawal Scheme For A Public Provident Fund Account

A PPF account as a lock period of 15 years. But there is a flexibility in this scheme. After the beginning of the 7th financial year following the commencement of the account, withdrawals can be made. The amount that can be withdrawn is either of the followings which is lower:

  • The withdrawal amount is equal to 50% of the amount that is present after the 4th financial year preceding the year of withdrawal.
  • The withdrawal amount is equal to 50% of the amount at the end of the preceding year.

Reviving A PPF Account In Case Of Failure To Maintain It

If a subscriber fails to pay the minimum amount of INR 500 to maintain the PPF account, the account is deactivated. In order to revive the account, the account holder must pay an additional INR 50 along with the minimum contribution of INR 500 for each inactive year. Public Provident Fund has the provision of nomination. Thus failure to maintain an account in the case of death of the primary account holder has other rules. In such a case, the entire amount can be withdrawn by the nominee or heir as the account cannot continue in the absence of primary holder.

Closing A PPF Account Prematurely

To increase the flexibility of a PPF account, changes were made regarding the premature closing of an account in 2016. After the end of 5 years, an account can be closed and the entire amount can be withdrawn in case of medical necessities or education. But, a penalty of 1% of the interest has to be borne by the account holder.

How To Close A PPF Account: Permanent Closure

After the maturity period of 15 years, if you wish to close down your PPF account it can be done via your respective Bank or Post Office. There are certain conditions as far as closing your account is concerned.

  • You can completely withdraw your funds from the PPF account. The funds withdrawn are subject to the set interest rates, hence you can earn the complete interest amount.
  • There is also an option to withdraw the amount in installments. But this option can be availed for only a year after the maturity.
  • If you do not close your PPF account after maturity, you will continue to earn an interest. But you cannot add any further monetary funds to that account. Also, a new PPF account can only be opened if you close your existing account.

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