PPF (Public Provident Fund): Features & Tax Benefits

Written by : Knowledge Centre Team

2022-09-26

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Public Provident Fund or PPF was introduced in 1968, as a means to provide everyone equal opportunity to save for their retirement. The 15-year saving scheme was to bring the self-employed and unorganised sector employees to par with the organised sector workers.

This investment option has evolved significantly over the years and today serves as one of the best sources of long-term savings and tax benefits. In this article, we will discuss what is PPF scheme and highlight its features and tax benefits.

Public Provident Fund (PPF) is a long-term saving product that provides guaranteed returns and tax benefits. One great advantage of this scheme is that it allows you to keep your investments secure while generating interest at competitive rates (7.1% per annum).

Funds in a PPF account are protected against all contingencies, including bankruptcy or loss of job during tenure. As such, it is one of the safest investment options for individuals with a low-risk appetite.

Features of a PPF Account

PPF account has kept up with the changing market situations and is one of the most popular retirement related investments. The following features of the PPF account make it one of the must-have investments in India:

Only Indian residents can invest in PPF
You can operate only one PPF account in your name
The PPF scheme's duration is 15 years.
The minimum deposit you can make per year is Rs. 500 (per deposit), and the maximum deposit can be Rs. 1.5 lakhs
You can get tax benefits up to Rs. 1.5 lakh as stated under Section 80C of the Income Tax Act, 1961
The maturity value and interest income from the PPF account are exempt from tax
PPF offers safe returns with a sovereign guarantee. Thus, it is one of the safest investments in India
Extend account after maturity in batches of 5 years for any number of times
Partial withdrawals are available after completing the sixth financial year in the plan
Withdrawals are tax-free from the PPF account
PPF account cannot be attached by a court against your borrowings. Thus, PPF also offers financial safety to your family.
The interest rate on the PPF deposit is 7.1% p.a. with effect from 1st April 2020. Interest is compounded annually.

When to Invest in a PPF Account?

You can open a PPF account at any time you want in a year. It is best to invest in this fund as it will offer a better power of compounding over the years. The account can be extended for five years multiple times after maturity. Take care of the following while starting your PPF investments:

Since there is no upper age limit for opening a PPF account, you can also invest in PPF for a tax-free pension after retirement.
The maximum limit for annual contribution is limited. So, starting early helps you maximise returns.

Recommended Reading - Compound Interest Investment

How to Draw Tax-Free Pension from PPF?

Creating your tax-free pension after you turn 60 is easy with PPF if you start investing in the plan early, i.e. before or by 30 years of age.

Assuming you invest Rs 8500 per month in PPF and earn an average return of 7% per annum, at the age of 60, you will have approximately Rs 1 crore in your PPF account.

Using the partial withdrawal facility, you can withdraw an average income of Rs 68,000 per month from the deposit up to the age of 90.

While the total annual income amounts to more than Rs 8 lakhs, this entire amount is free from any direct or indirect tax liability.

How to Open a PPF Account?

You can open a PPF account at a post office or any centralised bank either offline through a branch or online banking.

Documents Required to Open a PPF Account

PPF account opening application form
KYC documents - Aadhaar, voter's id, driving license, etc.
Residential address proof
Nominee declaration form
Passport size photograph

Process of Opening a PPF Account

a) Offline Method

Visit your nearest Post Office or Bank
Complete the application form and submit all required documents
Once your account is opened, you can deposit in a lump sum or invest over time

b) Online Method

Log in to the net banking portal of your bank.
Find and click the option 'Open a PPF Account.
Select the type of account you want to open - Self Account/Minor Account.
Enter all the relevant information in the application form and verify the details.
Enter the total amount you wish to deposit per financial year.
You can also set standing instructions that allow an automatic deposit to your PPF account as per your preferred intervals.
Submit the application. An OTP will be sent to your registered mobile number to confirm the transaction. Enter the OTP.
After you have completed all the above steps, your PPF account will be created.

How to Withdraw Money from PPF Account?

An individual can withdraw money from PPF after it has been in the account for a minimum of 5 years. There is no specific duration for this. You can withdraw anytime you want as long as you have waited for at least five years from the account opening date.

The withdrawal amount cannot exceed 50% of the total amount in your account or a maximum limit decided by the government every year.

Withdrawal Process

1. Download Form C from your bank's/post office website. Fill in the relevant details.
2. Submit the form to the bank/post office branch where you have your PPF account.

What is Form C in PPF?

Form C consists of the following three sections:

Section 1: The declaration section wherein you need to provide details such as your PPF account number and the amount you wish to withdraw. Along with that, you also have to specify how many years have passed since you opened the PPF account.

Section 2: The Office Use Section which comprises details such as:

Date of the initial subscription
The total amount available in your PPF account
The date on which the previous withdrawal was allowed
The total amount available for withdrawal as per para 9(1)/9(3) of the scheme
The amount of money sanctioned for withdrawal

Section 3: The bank details section, asks for your bank details such as your bank account number, IFSC code, etc.

Alternative Investment Options to PPF

Two investments which are comparable to PPF and even better for aggressive investors are as follows:

1. National Pension Scheme (NPS)

NPS is a government-sponsored pension scheme for retirement savings in India. It is regulated and governed by PFRDA (Pension Fund Regulatory and Development Authority).

An NPS Account offers the following benefits:

Invest in a portfolio of investments as per your risk appetite
Safeguards retirement as normal withdrawals not available before 60
The employer can also contribute to your NPS account
Additional deduction of up to Rs 50,000
Economical: NPS is one of the most economical/low-cost investment options
Portability: Regardless of job changes, state of residence, or physical mobility, your NPS account or PRAN remains the same

Also Visit - How to Invest in NPS?

2. Unit Linked Insurance Plans (ULIPs)

A ULIP is a life insurance plan which allows investment into diversified market portfolios of equity and debt. When you buy a ULIP, part of the premiums goes towards your life insurance, and the rest is invested in the fund of your choice.

You can choose to invest in stocks, bonds, or some mixture of both based on your risk tolerance and long-term goals.
You can stay invested in ULIPs like Invest 4G from Canara HSBC Life Insurance for up to 99 years of age
Since partial withdrawals are tax-free from ULIPs, you can also use ULIPs to create a tax-free pension stream

3. Guaranteed Savings Plan

iSelect Guaranteed Future is a guaranteed plan with an option to receive income once you turn 60. The plan is also comparable to PPF in terms of safety of invested capital and interest earned:

Offers guaranteed maturity value
Guaranteed bonus additions for regular investors
Income from the plan is completely tax-free
The invested money is deductible under section 80C up to Rs 1.5 lakhs a year

PPF is a low-risk investment option that provides people with a decent tax-free return. It is also an effective retirement saving tool for those who do not want to invest in equities. The returns are comparatively low but steady and predictable, which makes it a great long-term investment plan for both new and experienced investors.

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