PPF Account an Over view

The Public Provident Fund (PPF) is probably the most popular of all the tax-saving schemes. Under Section 88 of the Income Tax Act, you can invest up to Rs 70,000 of your income to claim a rebate of upto 30 per cent depending upon the rate of rebate applicable in your case. The PPF account may be opened at any branch of the State Bank of India (SBI) and its subsidiaries, a few branches of the other nationalised banks, and all head post offices. The minimum deposit is Rs 500.

You need a minimum investment of Rs 500 to keep a PPF account alive, and the maximum you could deposit in a financial year is Rs 70,000

Just about anyone can open a PPF account. You can open an account in your own name or in the name of a minor if you are the guardian. You can even open an account on behalf of a Hindu Undivided Family (HUF) using its income. The account can be opened even if you subscribe to a General Provident Fund or the Employees’ Provident Fund.

However, be warned: you can have only one PPF account in your name. If at any point it is detected that you have two accounts, the second account that you have opened will be closed, and you will be refunded only the principal, not the interest. Again, two adults cannot open a joint account. The account will have to be opened in only one person’s name; of course, the person who opens an account is free to appoint nominees.

A PPF account can be opened with a minimum deposit of Rs 500 at any branch of the State Bank of India or branches of its associated banks like the State Bank of Mysore or Hyderabad. The account can also be opened at the branches of a few nationalised like the Bank of India, Central Bank of India and Bank of Baroda, and at any head post office or general post office. After opening an account you get a pass book, which will be used as a record for all your deposits, interest accruals, withdrawals and loans.

For how long can you maintain your PPF account?

On paper, your PPF account must be maintained for a 15-year period. However, the tenure actually works out to 16 years, since you are allowed to make your last contribution in the 16th financial year. Even if you make a deposit on the last day of your account (that is, the day it is due to mature), you get a tax rebate, even though no interest accrues on the deposit.

Can you continue your account after the 15-year period?

Sure, but only in a block of five years at a time with no upper limit.

Will you have to continue investing after extending your account?

No. If you merely retain your balance, it will earn 8 per cent interest per annum till withdrawal.

What if you want to withdraw money during the extension period?

After the initial 15-year period, if you choose to extend the account and just maintain the balance, you can withdraw the entire sum in a lumpsum or in instalments. If you withdraw the money in instalments, you cannot make more than one withdrawal a year.

If you continue to deposit money in your account, you can withdraw up to 60 per cent of the balance to your credit at the beginning of each extended period (block of five years). The money can be withdrawn in a lumpsum. If you choose to withdraw it in instalments, you cannot make more than one withdrawal a year.

Do you have to notify the bank about the extension?

Yes. The Central Board of Direct Taxes (CBDT) has stipulated that after 15 years, the tax benefits under Section 88 will not accrue unless you choose to continue the account and deposit money in it.


How much money do you have to put into your PPF account?

Any amount not less than Rs 500 and not exceeding Rs 70,000 in a financial year payable in lumpsum or instalments in multiples of Rs 5. Not more than 12 instalments can be deposited in a year. However, unlike in a bank recurring deposit, you don’t need to deposit the same amount every month.


How much interest do you earn?

The interest rate is fixed periodically by the government. For now, it is 8 per cent compounded annually. The interest for a month is calculated on the lowest balance between the close of the fifth day and the end of the month, and is credited to the account at the end of each year. So, to get the maximum returns, make deposits in the first few days of the month.

How do you withdraw money from your account?

The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account. Of course, you can choose to continue the account beyond 15 years, but you will have to do so in blocks of five years.

Before maturity, you can make withdrawals within limits: from the seventh financial year, you can make one withdrawal every year of an amount not exceeding 50 per cent of the balance at the end of the fourth year or the year immediately preceding the withdrawal, whichever is lower. If, however, you have taken a loan, the amount you are eligible to withdraw will be reduced by the amount of loan you have taken.

If you choose to continue the account after 15 years and make deposits, you can withdraw up to 60 per cent of the balance to your credit at the beginning of each extended period (block of five years). The money can be withdrawn in a lumpsum. If you choose to withdraw it in instalments, you cannot make more than one withdrawal a year.

You can even retain the balance after 15 years without depositing any more money and without intimating the bank. The balance to your credit continues to earn interest till such time as you withdraw it. Of course, you can continue to make one withdrawal a year till you withdraw the entire amount.


Can you take a loan?

Yes, even before becoming eligible for a withdrawal in the seventh year, you can take a loan from the third year onwards. However, you cannot take a loan after you become eligible for the withdrawal facility. The loan amount should not exceed 25 per cent of the amount to your credit at the end of the financial year immediately proceeding the year in which you apply for the loan.

The loan is repayable in a maximum of 36 instalments at an interest rate of 1 per cent per annum. If you are unable to repay the entire loan in 36 months, you will have to pay interest on the deficit. Of course, you will not be eligible for a fresh loan until you repay the first one with interest.


Tax benefits, nominations, minors...

Benefits. Deposits (even those in the name of your spouse or minor children) are eligible for a tax rebate of upto 30 per cent under Section 88 of the Income Tax Act. What’s more, interest accruals and withdrawals are exempt from income tax, and the balance in your account is exempt from wealth tax. Further, the balance in your PPF account cannot be attached by the courts in the event of any debt liability.

Nomination. You can appoint one or more nominees to receive the money in your account in the event of your death. If you were to die before your account matures, your nominees get the money in your account after the initial lock-in period of 15 years. If you are in a transferable job, your can transfer your account to any scheduled bank or post office in the country.

Retirement planning. A PPF account is the most effective tax-saving vehicle for those sunset years which could give you amazing returns, particularly when you consider that there's at no risk at all! When used as an instrument for retirement planning, a PPF account can provide a really big corpus at the time of retirement.