What Is PPF And What Are The Advantages Of It?

In the fixed income space, the Public Provident Fund (PPF) is a popular investment avenue among investors. A PPF account allows individuals to invest up to Rs 1.5 lakh each year and also provides a tax deduction under Section 80C of the Income Tax Act. The account has a validity of 15 years and the account holder is supposed to deposit a minimum of Rs 500 every financial year.

The interest rate for PPF is set and paid by the government for every quarter. PPF interest rate for the first quarter of the year 2021-22 i.e. from 1st July to 30th September 2021 has been fixed at 7.1%.

Benefits of Public Provident Fund (PPF)

Given below are a few benefits of Public Provident Fund (PPF):

1. Lock-in Period

PPF is a long-term investment with a lock-in period of 15 years. This means that the amount accumulated in a PPF account can be withdrawn only at maturity, which is 15 years from opening the account. This tenure can be extended by 5 years at the end of the actual lock-in period. Premature withdrawals are allowed but only in case of emergencies.

2. Interest on PPF

Interest on PPF balance is calculated every month and the amount is credited to the PPF account at the end of every financial year. The interest rates are pre-announced by the Government for each quarter. Each month, the interest amount is calculated on the lowest PPF balance in the account after the 5th of every month to the last day of the month. Hence, PPF investors are advised to make contributions to their PPF account before the 5th of each month.

3. Minimum And Maximum Investment

Individuals need to make a minimum investment of Rs. 500 annually. A maximum investment of Rs. 1.5 lakh can be made in one financial year in a PPF account.

4. Taxation

PPF comes under the Exempt-Exempt-Exempt (EEE) category of tax policy which implies that the principal amount, the maturity amount, as well as the interest earned is exempt from taxes.

5. Loan Against PPF

A PPF account holder can take a loan against his PPF balance.  However, the loan can be taken only between the beginning of the 3rd year and the end of the 6th year from the date of account opening. The maximum loan amount is limited to 25% of the PPF balance at the end of – the 2nd year or the year preceding the year in which the loan is being applied.

6. Opening Of The Account

NRIs are not eligible to open PPF accounts. However, a resident Indian who has become an NRI after opening an account can continue the account until maturity. Parents/guardians can also open PPF accounts for their minor children
Opening of joint accounts and multiple accounts are not allowed. 

Conclusion

Due to its guaranteed returns and tax benefits, PPF is preferred by many individuals, particularly small savers who have a low appetite for risk. However, there are several other savings and investment options available to those who want better returns in the long-run or more liquidity with their investments. Some of the common alternatives to PPF are ELSS, Tax-Saver FDs and NPS.

Also Read: Before You Open A PPF Account, You Should Ask Yourself These Questions.