Some Common Question Regarding PPF

What is the Public Provident Fund (PPF)?
The PPF is a long-term, government backed small savings scheme of the Central Government started with the objective of providing old age income security to the workers in the unorganized sector and self employed individuals.


1. How long is the lock-in period?

The maturity period is 15 years from the close of the financial year in which the initial subscription was made. However, the effective period works out to 16 years i.e., the year of opening the account and adding 15 years to it. The contribution made in the 16th financial year will not earn any interest but one can take advantage of the tax rebate.

Example

Say the account was opened in the financial year 1990-1991 (the financial year is from April 1 to March 31). The scheme will mature on April 1, 2006 (1991 + 15 years).

That means you can make your last contribution even on March 31, 2006. The entire amount can then be withdrawn on April 1, 2006 or any time thereafter.


2. What is the interest rate offered through PPF?
Currently, the interest rate offered through PPF is around 8%, which is compounded annually. Interest is calculated on the lowest balance between the fifth day and last day of the calendar month and is credited to the account on 31st March every year. So to derive the maximum, the deposits should be made between 1st and 5th day of the month.


3. What is the minimum and maximum amount of deposit?
The minimum deposit that you can make into a PPF account in one whole financial year is Rs. 500. The maximum is Rs. 70, 000.


4. Who can open a PPF account and where?
A PPF account can be opened by an individual (salaried or non-salaried). An individual can open only one PPF account to which he contributes. A PPF account can also be opened in the name of your spouse or children.
It can be opened with a minimum deposit of Rs. 100 at any branch of the State Bank of India (SBI) or branches of it’s associated banks like the State Bank of Mysore or Hyderabad. The account can also be opened at the branches of a few nationalized banks, like the Bank of India, Central Bank of India and Bank of Baroda, and at any head post office or general post office.


5. What are the tax benefits from PPF?
The amount you invest is eligible for deduction under the Rs. 1, 00,000 limit of Section 80C. On maturity, the entire amount including the interest is non-taxable.

6. When can I withdraw from the account?

Say you need some money urgently and there still are a number of years to go for the PPF account to mature.

You can then make a partial withdrawal.

But you can do this is only after five financial years from the end of the year in which the initial subscription was made. In effect, this works out from the seventh year onwards.

The amount of withdrawal is limited to 50% of the balance in your account at the end of the fourth year -- immediately preceding the year in which the amount is to be withdrawn, or at the end of the preceding year. Whichever is lower.

Example

If the account was opened in 1993-1994 and the first withdrawal made during 1999-2000, the amount of withdrawal will be limited to 50% of the balance as on March 31, 1996, or March 31, 1999, whichever is lower.

7. What about a loan?

Sure you can. But only during a fixed period of time. You can take a loan from the third year of opening your account to the sixth year.

Also, the loan amount will be upto a maximum of 25% of the balance in your account at the end of the first financial year (if you opt for the loan in the third year).

If you opt for a loan in the fourth year, the second year's balance will be taken in to account and so on.

Example

Let's say the account is opened during the financial year 1997-1998. You can take the first loan during the financial year 1999-2000.

The amount will be upto a maximum of 25% of the balance in your account at the end of the first financial year (if you opt for the loan in the third year). In this case, it will be March 31, 1998.

8. How many loans can I take?

However many you want, though certain criteria have to be fulfilled.

- The loan must be repaid within 24 months.

- You can go in for a second loan only after the first loan is repaid in full.

- As mentioned above, you can take a loan only from the third year of opening your account to the sixth year.

Incidentally, the loan does not come cheap. Usually, the rate of interest on the loan taken will be around 2% above the rate of interest earned on the deposits in PPF.

Do note: only you can make a partial withdrawal or take a loan. Your nominee cannot. 

9. What happens if I want to keep the account going?

Even after the expiry of 15 years, the PPF account can be extended for five years at a time.

You will still earn interest on your investment and avail of the tax deduction.

Should you die before the account matures, your nominee has the option of closing the account or continuing with it till maturity.

If s/he does not close the account on your death, the money deposited continues to attract interest, but fresh contributions, partial withdrawals and loans are not permitted.

Make PPF work for you!

When you invest in PPF, look at it from a long term point of view.

If you are, say, 22 years, you will get the money in your late 30's. You can probably utilise it as a down payment for your home loan. Or if you already have one by then, you could prepay your home loan. Else, just stack it away for retirement.

Most important, use the loan and withdrawal option only if you desperately need the money. I am not referring to a holiday here. A medical emergency is more like it.

Years down the road, when the cheque is handed over to you, you won't regret it.