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  4. PPF – Features, Withdrawal Procedure & Income Tax Benefits

PPF – Features, Withdrawal Procedure & Income Tax Benefits

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Public Provident Fund ( PPF ) was introduced in India in 1968 with the objective to mobilize small saving in the form of an investment, coupled with a return on it. It can also be called a savings-cum-tax savings investment vehicle that enables one to build a retirement corpus while saving on annual taxes. Therefore, anyone looking for a safe investment option to save taxes and earn guaranteed returns should open a PPF account. In this article we cover the following topics:

  1. How to open a PPF account?
  2. What is the interest rate on PPF?
  3. Essential features of PPF
  4. PPF withdrawal
  5. Procedure for withdrawal from PPF
  6. What are the tax benefits of investing in PPF?

1. How to open a PPF account?

A PPF account can be opened with either a Post Office or with any nationalized banks like the State Bank of India and Punjab National Bank. These days, even certain private banks like ICICI, HDFC and Axis Bank among others are authorized to provide this facility. Submit the duly filled application form along with the required documents i.e. the KYC documents like identity proof, address proof, and signature proof. And then deposit a prescribed amount towards the opening of the account.

2. What is the interest rate on PPF?

The current interest rate is 8% (for quarter October to December 2018 prior to which it was 7.6%) that is compounded annually. The Finance Ministry set the interest rate every year, which is paid on 31st March. The interest is calculated on the lowest balance between the close of the fifth day and last day or every month.

3. Essential features of PPF

    • Tenure: The PPF has a minimum tenure of 15 years, which can be extended in blocks of 5 years as per your wish.
    • Investment Limits: PPF allows a minimum investment of Rs 500 and a maximum of Rs 1.5 lakh for each financial year. Investments can be made in lump sum or in a maximum of 12 installments.
    • Opening Balance: The account can be opened with just Rs 100. Annual investments above Rs 1.5 lakh will not earn interest and will not be eligible for tax saving.
    • Deposit Frequency – Deposit into a PPF account has to be made at least once every year for 15 years.
    • Mode of deposit – The deposit into a PPF account can be made either by way of cash, cheque, Demand Draft or online fund transfer.
    • Nomination – A PPF account holder can designate a nominee for his account either at the time of opening the account or subsequently too
    • Joint accounts – A PPF account can be held only in the name of one individual. Opening an account in joint names is not allowed
    • Risk factor –  Since PPF is backed by the Indian government, it offers guaranteed, risk­-free returns as well as complete capital protection. The element of risk involved in holding a PPF account is minimal.
    • Who can invest in PPF – Any Indian citizen can invest in PPF. One citizen can have only one PPF account unless the second account is in the name of a minor. NRIs and HUFs are not eligible to open a PPF account.
  • Loan against PPF –  You can take a loan against your PPF account between the 3rd and 5th year. The loan amount can be a maximum of 25% of the 2nd year immediately preceding the loan application year. A second loan can be taken before the 6th year if the first loan is repaid fully.

4. PPF withdrawal

As a rule, one can close a PPF account only upon maturity i.e. after completion of 15 years. Upon completion of 15 years, the entire amount standing to the credit of an account holder in the PPF account along with the accrued interest can be withdrawn freely and the account can be closed.

However, if account holders are in need of funds, and wish to withdraw before 15 years, the scheme permits partial withdrawals from year 7 i.e. on completing 6 years.

An account holder can withdraw prematurely, up to a maximum of 50% of the amount that stood in the account at the end of 4th year preceding the year in which the amount is withdrawn or at the end of the preceding year, whichever is lower. Further, withdrawals can be made only once in a financial year.

5. Procedure for withdrawal from PPF

In case you wish to partially or completely withdraw the balance lying in your PPF account, you can do so by submitting an application for withdrawal in Form C with the concerned branch of the bank where your PPF account lies. This form is available for download here.

This form has 3 sections:

1. Declaration section where you must provide your PPF account number and the amount of money you propose to withdraw. Along with that, you also need to mention how many years have actually passed since the account was first opened. 

2. Office use section which comprises of details like:

  • Date when the PPF account was opened.
  • Total balance standing in the PPF account.
  • Date on which the previously requested withdrawal was allowed.
  • Total withdrawal amount available in the account.
  • The amount of money sanctioned for withdrawal.
  • Date and signature of the person in charge – usually the service manager.

3.  Bank details section which asks for the details of the bank where the money is to be credited directly or the bank in whose favor the cheque or the demand draft is to be issued.

It is also mandatory to enclose a copy of the PPF passbook along with this application.

6. What are the tax benefits of investing in PPF?

PPF one an investment vehicle that falls under the Exempt-Exempt-Exempt (EEE) category. This, in other words, means that all deposits made in the PPF are deductible under Section 80C of the Income Tax Act. Furthermore, the accumulated amount and interest would also be exempt from tax at the time of withdrawal.

It is also important to note that a PPF account cannot be closed before maturity. Furthermore, a PPF account can be transferred from one point of designation to another. But, do remember that a PPF account cannot be closed prematurely. Only in the case of the account holder’s demise can the nominee’s file for the closure of the account.