Public Provident Fund – PPF – All in One Investment Product

by Gopal Gidwani on March 15, 2010 · 43 comments

in Fixed Income Securities,Uncategorized

Introduction
It’s the busy month of February and lot of people are exploring last minute investment options to save on income tax. What all things does an investor expect from an investment product? Let us try to list some of these expectations:

  • First and foremost thing that comes to mind is the income tax benefits. In case of many people this is the very reason they begin their hunt for investment products. The investor expects income tax deduction benefit at the time of investment and the returns on maturity should be tax free.
  • Second thing that comes to mind is the returns expectations and the risk involved. People expect that the risk involved should be low and the returns derived should be high or reasonable. Investors expect that the returns should be able to beat inflation.
  • Third thing that comes to mind is the liquidity that the investment product offers. The investor expects that he should be able to make premature withdrawals or he should be able to take a loan against the investment that he has made in the product. If the product comes with both premature withdrawal facility as well as loan against the investment; then nothing like it.
  • Fourth thing that comes to mind is the investment time horizon. The tenure should be flexible. Also the product should be a good long term investment tool for wealth creation. The investment product should be good enough to meet long term objectives/goals like retirement planning etc.
  • Fifth thing that comes to mind is the flexibility of the investment product. The investor expects that the regular minimum amount and the maximum amount that can be invested in the product should be flexible.

Hmmmmm ……… So that’s quite a few expectations. Now which product offers you a combination of all these features? Well it is difficult to figure out an investment product that will offer you all these features exactly as you want them …… but the one that comes closest to meeting the maximum expected (required) features of an investment product is none other than PPF ……… Yes you got it right ….. We are talking about Public Provident Fund (PPF). This is one of the most popular tax saving and investment tool used by a vast majority of the population. So what is it that makes this product so popular among the investor community ……. Let’s explore

Features of Public Provident Fund
Opening of Account
A PPF account can be opened with any authorized branch of the State Bank of India (SBI) or its subsidiaries or any post office or any other bank as authorized by the Government from time to time.
On opening a PPF account the investor is issued a passbook. The passbook contains the details of all the transactions that have happened in the account like date, deposits, withdrawals, interest etc.
A PPF account can be transferred from one bank branch to another bank branch or from one post office to another post office or from one bank branch to a post office or from one post office to a bank branch.

Safety
Public Provident Fund is a Government sponsored scheme. It is backed by the Government of India. Since the product comes with sovereign guarantee; it offers the highest safety and credibility. The safety of both the principal as well as the interest is assured.

Minimum and Maximum Amount
The investor has to deposit a minimum of Rs 500 in a year. This low amount ensures that even people belonging to lower income group can subscribe to PPF scheme.
The maximum amount that can be deposited in a year is Rs 70,000.
The investor can make a maximum of 12 deposits in a year. But this is not subject to 1 deposit per month. The investor can make the 12 deposits in a year at any time as per his convenience and the liquidity available.

Tax Benefits
The contribution made to a PPF account upto Rs 70,000 every year qualifies for deduction from taxable income under Section 80C of the Income Tax Act.
The maturity proceeds received from a PPF account are tax free in the hands of the investor. This means the interest earned on the PPF account is tax free.
PPF accounts are also exempt from wealth tax.
Also balance in a PPF account cannot be attached under a court order due to any debt or liability of the investor. This is beneficial to business people.

Returns
The Government announces the annual interest rate payable every year on PPF deposits. Presently the interest payable on PPF is 8% compounded annually.
The interest paid on the PPF account is tax free in the hands of the investor.
An interest rate of 8% and that too tax free is effectively much more than 8% if the person falls in the 30% tax bracket. Let us compare this PPF 8% tax free return with another debt instrument like Bank FD which is also offering 8% return. The interest earned on Bank FD’s is taxable and this effectively reduces the post tax return below 8%. In such a scenario PPF becomes much more lucrative as compared to bank FD’s.
Although the interest paid on PPF is not fixed and announced every year by the government; the rate is very stable as any rate change will affect crores of people who have invested in the scheme.

Tenure
The tenure of the scheme is for 15 years. However on maturity if the depositor wishes to continue then the account can be extended for a block of 5 years at a time and the investor can continue making deposits.
However if the depositor wants to continue with the account without making any further deposits; in that case also he can still continue with the account.
On PPF accounts that are extended, one withdrawal per year is permissible.
PPF account is a very good long term investment tool for wealth creation. It can also be used as a retirement planning tool.

Loans and Partial Withdrawals
A person can take a loan against his PPF Balance between the 3rd year and the 6th year.
A person can make partial withdrawals from his PPF Account from the 7th year onwards for meeting any emergency requirements.
Also from the 7th year onwards the person can make a withdrawal from his account and deposit it again as a fresh contribution for that year. For this contribution also the person can avail tax benefits under Section 80C. So this way he does not need to put fresh money from his pocket. So it becomes like a self sustaining fund from there on.

Interest Calculation
The interest on the PPF balance is credited to the account on 31st March every year.
For interest calculation the lowest balance between the 5th of the month and the last date of the month is used. So it is good practise to deposit money in your PPF account before the 5th of the month to take full benefit of the interest.

Other Miscellaneous Features
For self employed people, professionals and businessmen who do not have access to Employee Provident Fund (EPF), PPF can serve as an excellent investment tool.
There is no age restriction for opening a PPF account.
In case of PPF joint accounts are not allowed. The account has to be in a single name.
PPF accounts come with Nomination facility. Premature closure of account is permissible only in case of death of the investor. On the death of the investor the proceeds of the account are passed on to the nominee. On death of the investor the nominee cannot continue to operate the account. The account has to be closed in such cases.
Non Resident Indians (NRI) cannot open PPF account.
If the investor doesn’t make a deposit of Rs 500 in a year; then a penalty is levied.
If for whatever reason the deposit is not made; the account becomes discontinued. Such accounts cannot be closed before the tenure of 15 years. However a discontinued account can be activated (regularized) by paying up the respective amounts (minimum Rs 500) for every year of default and the penalty.

Conclusion
Apart from tax benefits, safety, good returns and flexibility the PPF scheme comes with lot of other benefits as discussed above. PPF serves the purpose of salaried class people as well as businessmen and self-employed persons. It serves as an excellent wealth creation and retirement planning tool. No wonder PPF is one of the most famous investment products in the country and is the darling of investors!!!!
So in case you don’t have a PPF account; open one today.

You can leave a comment below on the article or you can share your views with us at gopal_gidwani@yahoo.com


{ 43 comments… read them below or add one }

Saurav Sinha November 13, 2010 at 3:16 pm

Hello Sir, I would like to know how much money I will get after investing 30K or 50K in PPF after 15years? And can I nominate my Parents or wife in case of my death?

Reply

Gopal Gidwani November 14, 2010 at 9:45 am

Hi Saurav,
The final amount depends on how do you deposit the money. I mean whether you deposit the amount of Rs 30,000 or Rs 50,000 lumpsum at one go or a small amount every month. If you deposit a lumpsum amount of Rs 30,000 every year then the maturity amount will be roughly Rs 8,14,500. If you deposit a lumpsum amount of Rs 50,000 every year then the maturity amount will be roughly Rs 13,57,600. The maturity amount also depends on whether you deposit the money at the beginning of the year or at the end of the year.

Also you can make your wife or your parents as nominee.

Reply

Saurav Sinha November 14, 2010 at 11:50 am

Thanks a lot Sir… few more doubtsif you dont mind…

1) U said investing 30K or 50 K in small amounts… so U mean money can be invested like an sip??
2) Is 8% the max interest rate available right now? Does it vary & in what way, whether always rates increase or might decrease?
3) Which Govt body revises the interest rates on PPF & after DTC, will the returns be taxable as well?
4) I have an ICICI & IDBI savings account. Can taking PPF from any institue be limked to these savings account for online funds transfer?

Reply

Gopal Gidwani November 15, 2010 at 12:38 pm

Hi Saurav,

There is no SIP concept in PPF like you have for Mutual Funds where the money is debited automatically from your bank account. You will have to deposit the money on your own. In a PPF account you can deposit money 12 times in a year. Now this does not necessarily mean that you have to make one deposit every month.

As of now the interest rate paid is 8%. The interest rate varies and is regulated by the Finance Ministry. Initially the interest paid on PPF was 12%. This was gradually reduced to 11% and then to 10% and then to 9% and finally at present it is at 8%.

Whether the returns will be taxable after DTC, I cannot comment on that as there is still no clarity on that. DTC will be implemented from FY12.

You can open an PPF account with any authorized branch of the State Bank of India (SBI) or its subsidiaries or any post office or any other bank as authorized by the Government from time to time. I dont know whether direct debit or online fund transfer is allowed or not in case of PPF. I suggest you approach a Branch of SBI and find out from them.

I hope I have answered your queries.

Best Regards
Gopal Gidwani

Reply

Saurav Sinha November 15, 2010 at 6:07 pm

Thanks a lot again Sir… just 1 more doubt… suppose I start a PPF today & the rates are revised tomorrow or after a year or 2 or more years, will the revised rates be applicable to me as well?

Reply

Gopal Gidwani November 16, 2010 at 12:17 pm

Hello Saurav,

I have no idea on whether change in PPF rates applies to exisiting customers or not. You can ask the SBI Official about this. According to me in case if the revised rates are made applicable to exisiting account holders then the new rate will be applicable from the revision date. But this is my guess. So it will be better if you get this clarified by the SBI Official or the Post Office.

Reply

deepak December 24, 2010 at 11:09 am

sir,

Let consider investment in ppf account for the financial year 2010-2011
1)if i invest 5000 each month in ppf for one year.
2)invest 60000 in ppf in the month of february.

will i get same interest in the both cases or not?

Reply

Gopal Gidwani December 26, 2010 at 8:24 am

Hello Deepak,
The 2 scenarios that you have mentioned above you will not get the same interest
1) If you invest Rs 5000 each month then the interest will be calculated as follows. The EPFO people consider the lowest balance between the 5th of the month and last date of the month and calculate the interest on that amount. So to maximise your returns make sure you make the monthly deposit before the 5th of the month. Now the interest will be calculated on a monthly basis @ 8% per annum pro-rated monthly. The monthly interested amount is accrued but not credited to your account. This way every month the interest is calculated on the account balance for all the 12 months and stored in the system. Then on 31st March the interest for the entire year will be credited to your account.

2) If you invest Rs 60,000 in the month then in this case you will get interest for only 2 months of February and March. In February the interest will be calculated on the balance in the account @8% per annum and then pro-rated for one month. Same process will be followed in March where the interest will be calculated on the balance in the account @8% per annum and then pro-rated for one month. On 31st March the interest for 2 months will be credited to your acccount.

So if you deposit Rs 5000 every month you will get more interest rather than depositing a lumpsum of Rs 60,000 in February.
I hope I have answered your query.

Best Regards
Gopal Gidwani

Reply

Narasimha Rao January 3, 2011 at 10:29 am

Dear Gopal,
Thanks for the detailed posting on PPF. It has motivated me to open the account a couple of days ago. I read in your article that the NRI can not open a PPF account. But if a person has opened the PPF account while working in India and after an year or two, if that person immigrates to another country, can he still continue to operate his PPF account by depositing Rs. 70,000 each year, until the maturity time of 15 years?

Reply

Sandeep May 7, 2011 at 8:26 pm

Dear Gopal,
Thanks for the detailed posting on PPF. It has motivated me to open the account a couple of days ago. I read in your article that the NRI can not open a PPF account. But if a person has opened the PPF account while working in India and after an year or two, if that person immigrates to another country, can he still continue to operate his PPF account by depositing Rs. 70,000 each year, until the maturity time of 15 years?

Reply

Gopal Gidwani May 14, 2011 at 8:24 am

Hi Sandeep,
Once you open an account when you are a resident citizen and then subsequently you become a NRI, you can continue operating the account normally

Reply

Rita January 12, 2011 at 10:55 am

Dear Sir,

I opened a new PPF in Dec 2010. As per the guidelines, I can deposit a maximum amount of Rs.70,000/- per year in a financial year. Does that mean that I can deposit Rs.70,000/- for the year ending March 2011 and then make a single or a series of deposits totalling Rs.70,000/- for the period April 2011-Mar 2012.

Regards
Rita, Chennai

Reply

Gopal Gidwani February 7, 2011 at 3:04 pm

Hi Rita,
You can invest a maximum of Rs 70,000 in a year and you can make maximum 12 deposits in a year. Now this does not mean you need to make one deposit every month. You can make 12 deposits anytime in a year.
So in your case you can deposit Rs 70,000 for the current financial anytime before 31st March 2011 and avail tax benefits for the entire amount for the financial year April 2010 – March 2011. For the next year April 2011 – March 2012 you can make a single deposit or a series of 12 deposits over a year totalling Rs 70,000

Reply

Girish February 2, 2011 at 11:04 am

Hello Sir,
If suppose i deposit lumpsum amount of 70,000 in April 2011 for next financial year will it yield more interest or should i deposit amount monthly i.e 5,833 per month to earn more interest.
which is the better option ??

Reply

Gopal Gidwani February 7, 2011 at 2:46 pm

Hello Girish,
If you invest Rs. 70,000 at the beginning of the year itself in April then you will earn interest on it for the entire year. But if you invest Rs 5833 every month then on the 1st installment you will earn interest for the entire 12 months, on the second installment of Rs 5833 for only 11 months, then on the third installment of Rs 5833 for only 10 months and so on.

So if you have lumpsum amount you can invest at one go and enjoy interest on the whole amount of Rs 70,000 for the entire year. People who cannot invest the entire amount of Rs 70,000 at one go can invest every month. You can make 12 deposits in a year but not necessary you need to make a deposit every month.

Reply

Sangram Patil February 15, 2011 at 11:38 am

Dear Sir,

I am just seeking for one plan which will give me high returns after 5 years and will also come under 80c for tax deduction. Also this plan needs to be risk free and should not be a part of any ULIP based product. Can you please suggest me any plan which follows all of the above criterias.

Thanks,

Sangram Patil

Reply

Gopal Gidwani February 15, 2011 at 3:23 pm

Hi Sangram,
A product that gives high returns after 5 years and that too risk free is a myth. No such products exist in this world. If u dont want to take risk and want to get tax benefits, you can invest in a Tax Saving Bank FD for 5 years or National Savings Certificates (NSC) for 6 years. The interest rate on Bank FDs will be around 8% and NSC is 8.16%. Else for higher returns you can invest in Equity Linked Savings Schemes (ELSS) but high returns come with high risk

Reply

subhash March 17, 2011 at 7:18 am

Dear Sir,

I opened a new PPF in Dec 2010. As per the guidelines, I deposited a maximum amount of Rs.70,000/- in dec 2010 . i want to deposit 70000/- in 1st april 2011 . so bank people will accept my deposit or not can you tell me what i should do

Regards
subhash

Reply

Gopal Gidwani March 17, 2011 at 12:38 pm

Hello Mr. Subash,

You can very well deposit the amount of Rs. 70,000 on the 1st of April, 2011. There is no question of the bank not accepting the deposit. From April 1st the new financial year will begin and every financial year you can deposit Rs. 70,000. The deposit of Rs. 70,000 that you will make on 1st April 2011 will be counted for the financial year 1st April 2011 – 31st March 2012.

I hope I have answered your query.

Reply

Mahalakshmi March 28, 2011 at 6:32 am

Hi Gopal,

Very nice updates from your end… Thanks for this blog.

Regards
Maha

Reply

Gopal Gidwani March 28, 2011 at 3:12 pm

Hi Maha,
Thanks for your kind words……….. 🙂

Reply

jyoti buckda March 30, 2011 at 11:44 am

Hello sir,

I want to know if i open ppf account on 31st march so i will get interest in a year of 2010-2011 or next finicial year 2011-2012
Thanks & Regards
Jyoti

Reply

Gopal Gidwani April 4, 2011 at 6:15 am

Hi Jyoti,
In an PPF Account the lowest balance in the account between 1st and 5th of the month is taken for interest calculation. So if you open your account on 31st March then for the month of March you will not get any interest as the balance between 1st March and 5th March in your account will be Rs. 0 and that is the amount that will be taken for calculation of interest. So for the Financial Year 2010-11 you will not get any interest.

For the next Financial Year 2011-2012 to earn interest for the month of April make sure you deposit the money in your account between 1st and 5th April else you will not get any interest for the month of April also.

Reply

Girish April 27, 2011 at 5:48 am

Dear sir,

Thanks for the detailed information of PPF.

One thing i would like to know is i f in this april 2011 i made investment of 70,000 does it makes compulsion for me that i need to pay every further year same amount or any amount above 500 will do?

Reply

Gopal Gidwani April 27, 2011 at 9:54 am

Hi Girish,

The minimum you need to deposit every year is only Rs. 500. And the maximum you can deposit in a year is Rs. 70,000. So if you deposit Rs. 70,000 in April 2011 there is no compulsion of depositing Rs. 70,000 next year and in the subsequent years. In the financial year April 2012 – March 2013 a deposit of Rs. 500 will also do. Any deposit between Rs. 500 and Rs. 70,000 in the entire year will do

Reply

anu jha September 13, 2011 at 12:51 am

hello sir,
how much amount i got after 15 years if i deposited 60,000 yearly in ppf account.

Reply

manish maravi September 18, 2011 at 2:27 pm

Dear sir
thanx for all information.i want to open a ppf acc. before march 2012 i want to know if new dtc is applied from next session will my acc enjoy the coming rules like EEE catogary?

Reply

Gopal Gidwani December 2, 2011 at 7:36 pm

Till we dont see the final print of DTC we cannot comment on what will be under EEE or EET category. So let us wait for Budget February 2012 to see what the Finance Minister has in store for us!!!

Reply

kb November 16, 2011 at 10:17 am

need your advice.
i want to invest in PPF and NSC both. pls advice whr shd i invest more amount.
total amt monthly i would like to invest is approx 3,000rs. please suggest.

Reply

Gopal Gidwani November 19, 2011 at 1:01 pm

Hello,
In NSC the investments are one time and locked for 6 years. Whereas PPF account is very flexible. You can decide how much amount you want to deposit every month or any other frequency. The lockin for PPF is 15 years. So if you time horizon is long, go for PPF.

Reply

Nilkanth_vyas December 19, 2011 at 12:50 pm

Dear Sir,
I want to know (1) How many times the PPF account is extended for further period of 5 years? (2) If some one has paid initally for two three years and there after no amount is deposited, can paneluty be implemented on closure of the account after 15 years? (3) What is the maximum age for opening the PPF Account?

Thanks

– Nilkanth Vyas

Reply

Gopal Gidwani December 21, 2011 at 11:43 am

Hello Nilkanth,
1) As far as I know there is no limit as such on the number of times the 5 year extension can be sought.
2) You need to deposit a minimum of Rs 500 per year else a penalty will be imposed.
3) I have not read anywhere about any maximum age for opening a PPF Account

Reply

nandana November 18, 2011 at 6:18 pm

Hello Sir,
I know nothing about this ppf but I want to know one thing if I pay Rs5000 per month for 15 years as my ppf, how much i get after that period I mean after 15 years.Please help me out.Thank You

Reply

Gopal Gidwani November 19, 2011 at 12:49 pm

Hello Nandana,
If you put Rs 60,000 every year (Rs 5000 per month) in your PPF account then at the end of 15 years you will have Rs 17 lakhs (approx) if the interest rate stays constant at 8% throughout

Reply

Prasad January 2, 2012 at 10:58 am

Hello Gopal,
I must appreciate you for providing so much info on PPF. Have few queries:

1. When is it best to open a PPF account? 1st March 2012 or 1st April 2012?
2. When the interest is calculated on monthly basis,is the interest also added for the interest calculation for the following month? I mean if P is the amount deposited in April and I is the interest earned for the month, then for May, does the principal include the interest I earned in April?

Thanks,
Prasad.

Reply

Gopal Gidwani January 9, 2012 at 12:59 pm

Hello Prasad,
On the interest front it does not make a difference whether you open an account in March or April. You will get interest only for the time period the money is put in the PPF Account. The only benefit of opening an account in March at the last moment is that you can claim tax benefit for the money deposited in the account for the financial year that is going by.

I dont think the interest calculated for the particular month is added for calculation of the interest for the next month. I guess only principal amount is used. As far as my knowledge goes, the interest compounding in PPF is annual. What you are talking about is monthly compounding.

Reply

Nilkanth Vyas January 10, 2012 at 8:16 am

Hallo Prasad,

By opening the account in March, Your account will matured one year earlier. Because you can close the PPF account at any time after the expiry of the 15 years from the ennd of the year in which the account is opened.

– Nilkanth

Reply

Gopal Gidwani January 10, 2012 at 12:05 pm

Hi Nilkanth,
Thanks for sharing that info. But after the completion of 15 years, the PPF account can be extended by a block of 5 years at a time and there is no limit on the number of 5 year extensions that can be sought.

Reply

vaibhav August 22, 2012 at 4:49 am

Hi gopal,
Greetings of the day !!!My query to you is that i have a PPf account in post office since 2010 in my name only.which i have kept alive by just depositing 500/-every year till now.BUT now i have a salaried account in bank of baroda which gives facility of PPF acount too. So my FIRST question is whether i can open one more account in name of MY daughter who is minor with me as GUARDIAN.And I intend to deposit 99500/- in this new account and 500/- in my first PPF account.Is it possible to do this. SECOND question -if this is not possible then what is porcedure of transferring my PPF account form post office to bank of baroda?

thanks

Reply

Gopal Gidwani August 24, 2012 at 7:41 am

Vaibhav you can open a PPF account in your daughter’s name as a Guardian.

It is also possible to transfer the PPF account from post office to BOB. You will have to fill a account transfer form and submit it. Make sure you make photocopies of the original passbook before submitting it for transfer. This will help in taking care of any discrepancies that may arise post the transfer. Also the transfer make take some time like a month or more, so you will have to be patient.

Reply

vaibhav August 24, 2012 at 8:17 am

Gopal thanks so much for your valued opinion..
So is it possible for me to avail tax benefit of 100000/- by depositing 99500/- in my daughter account (where i am the guardian) and 500/- in my own account???

Reply

Gopal Gidwani August 24, 2012 at 11:39 am

Hello Vaibhav,
The amount contributed in a minor’s PPF account is clubbed with the income of guardian and the tax benefits can be availed for a total of Rs. 1,00,000 (as per current rules). So in your case you can deposit Rs. 99,500 in your daughter’s account. The total income tax benefit that you can avail for the 2 accounts together (your PPF a/c and your daughter’s PPF a/c) will be capped at Rs. 1,00,000.

Reply

vaibhav August 25, 2012 at 5:12 am

thanks so much for your valued opinion.

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