Public Provident Fund
In this section, we will discuss 'Public Provident Fund' (PPF), which is a retirement savings scheme offered by the Government of India. It aims to provide a secure post-retirement life to everyone.
Public Provident Fund (PPF) is a scheme wherein one can save for long term and enjoy tax benefits on the principal as well as interest. This scheme aims to provide income security to the self-employed and people working in the unorganised sector. It was introduced by the National Savings Institute of the Ministry of Finance in 1968. There is a lock-in period of 15 years before which the account cannot be closed or liquidated. However, one can avail a loan from their own PPF account, 3 years after the commencement of the account. Withdrawals, subject to various conditions are allowed from the seventh year of the commencement of the account. After 15 years, the scheme can be increased in blocks of 5 years.
How to Open a Public Provident Fund Account?
The following documents are required to open a Public Provident Fund account:
- Duly filled PPF account opening form
- Proof of identity. For example, driving license, Aadhaar Card, PAN card, Passport, Voter’s ID Card
- Proof of residence or current address proof
- Couple of passport size photographs
This account can be opened in both, post offices as well as banks. It is not necessary to have a savings account in the same financial institution where the Public Provident Fund account has been opened.
Interest Rate Mechanism
For PPF Accounts, the interest rate is 8% p.a. compounded annually. The interest rate is linked to G-Sec rates with a spread of 0.25%. The Government reviews the interest rates quarterly and any changes in interest rates would be applied to old as well as new deposits.
The following table gives a detailed description of interest earned from a PPF account by making yearly deposits of ₹50000:
Tax Implications
The scheme has exempt-exempt-exempt (EEE) status, where the deposits, the interest earned as well as the maturity amount are tax-free. The sum invested in the PPF account is eligible for tax deduction under Section 80C subject to a maximum of ₹ 1.5 lakh in a financial year. On maturity, the entire amount, including the interest, is tax free.
Risk associated with Public Provident Fund account
There is no risk involved as these deposits are backed by the Government of India. Principal and Interest are guaranteed. If inflation turns out to be higher than the nominal interest rate of the PPF, there would be no real returns available. Hence, it is not inflation protected. A major benefit of PPF account is that it cannot be attached by Court in respect of any debt or liability.
