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PPF Account: How to make the most of this tax-free Investment Option?

Karan Sharma Karan Sharma 11 June 2019

Looking for a guaranteed investment option? Know more about the wonders of having a PPF account.

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A PPF account, also known as a Public Provident Fund account is an excellent option for making retirement investment. Not only does it offer tax-free benefits, but also provides good interest as well. Under a Public Provident Fund account, you can deposit Rs. 1.5 lakhs per year for a lock-in period of 15 years and earn an interest rate of 8% at present. The rate of interest is compounded annually. Also, this scheme enjoys ‘EEE’ rating which means that the principal amount invested is entitled to tax deduction as per Section 80C of the Income Tax Act, 1961. The interest earned as well as the maturity amount is tax-free.

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How to open a PPF account?

Opening a PPF account is one of the easiest things to do on this planet. This facility is provided by all banks (private, public, government and post offices). You simply need to visit any of these institutions mentioned above with the relevant documents (KYC - Proof of ID and Address), fill the application form, assign a nominee and make a minimum deposit of Rs. 100. Additionally, you have to mandatorily deposit a minimum of Rs. 500 every year to keep your PPF account active.

What if I don’t maintain the minimum deposit?

The result is simple, if you do not maintain a minimum deposit of Rs. 5oo in a single financial year, the account will be deactivated. Additionally, you will have to submit a written application to revive your account and pay Rs. 50 as a penalty - for every year of default - along with a minimum deposit of Rs. 500. Although the account is dormant, your existing deposit will continue to earn interest annually.

Note: You will not be able to make any withdrawal or close the account until the maturity date.

How will my money earn interest?

An ideal decision is to make a deposit in your PPF account before or on the 5th of the month. The current rate of interest stands at 8% on the minimum balance between the fifth day of the month and the last day of the month. If you deposit Rs. 10,000 in your PPF account at the beginning of the month and then another deposit of Rs. 5,000 on the 10th day of the month, you will earn interest on the higher balance of Rs. 10,000. If you invest Rs. 1.5 lakhs in a PPF account annually before the 5th of every month, you are most likely to gain 2.5x the monthly investment of a person who always invests later than this date.

Can I make a partial withdrawal?

A PPF account comes with a mandatory lock-in period of 15 years. You can make a partial withdrawal post five years of opening an account. The deposit amount is capped at 50% of the balance in the PPF account at the end of the fourth year. As an added benefit, you can take a loan against your PPF deposit. As long as your PPF account is active (from the 3rd financial year upto the end of the 5th year), the loan amount is limited to 25% of your PPF deposit. The rate of interest on the loan is 2% higher than the current rate of interest which stands at 8%.

How long do I have to stay invested in a PPF account?

A PPF account comes with a mandatory lock-in period of 15 years from the date of opening the account. The maturity date is calculated at the end of the financial year when you first made a deposit in your account.

Can I make a premature withdrawal?

As per the Public Provident Fund (Amendment) Scheme, 2016, you can close a PPF account only after completing 5 financial years. Premature withdrawal is allowed in case you require money for a medical emergency (serious or life-threatening ailment afflicting the accountholder or his/her spouse, dependent children or parents). Another instance where you are allowed to make a premature withdrawal is when the amount is utilised for funding higher education.

What will happen during maturity?

When a PPF account reaches its maturity period of 15 years, you can make a complete withdrawal of your deposit. The other option is to extend your PPF account for five years post maturity. You can extend your PPF account by intimating the account office and submitting Form H. If you do not submit Form H, the additional deposits made during the 5 years extended period will be treated as irregular and no interest will be paid on them. The amount will no longer be tax-free.

Additionally, you can extend your PPF without making any deposits and still earn tax-free interest on the same. Under the extended PPF option, you can make one withdrawal in each financial year. If you continue to make regular deposits in the extended period, the single partial withdrawal limit is capped at 60% of your account balance.

How much returns can I expect?

A PPF generates good returns if you remain invested for a long time. The same is applicable when you extend a PPF post the maturity date. The longer the investment period, the greater the returns. If you invest Rs. one lakh per year at the current rate of interest (8%), you will get a corpus of Rs. 29.32 lakhs at the end of the 15 year lock-in period. If you invest Rs. one lakh per year during the 5 year extended term, at the end of the 5 year extended period, you will have successfully added another Rs. 20 lakhs in your PPF account making the total to Rs. 49.42 Lakhs.

From the above information, we can see that the PPF is an excellent option of investment. However, it is an individual’s choice whether to invest in a PPF account or not. Apart from compound interest, you can avail multiple benefits and features such as loan, partial withdrawal, tax-free proceeds, guaranteed returns, etc.

Recommended Read: Should you withdraw money from PPF Account to buy your home?

Karan Sharma
Written by Karan Sharma
Content Specialist and Strategist, foolishly creative and always ready for a game of 'Call of Duty'.