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Public Provident Fund

Definition: The Public Provident Fund, popularly known as PPF is the long-term saving scheme introduced by the Ministry of Finance (MoF) in 1968. The purpose of the PPF is to mobilize the small savings of individual by offering them investments that carry a reasonable return along with the income-tax benefits.

The Public Provident Fund is a tax saving instrument backed by the government of India on which regular interest is paid. The deposits made in the PPF can be claimed for the tax deductions and also the interest accrued on the deposits is tax-free. Public provident fund is one of the most lucrative avenues available in India, that has following features:

  1. Any Individual, who is a resident of India, can open an account under public provident fund and earn handsome returns on the deposits relatively higher than the returns on banks fixed deposits.
  2. A subscriber to the PPF account is required to deposit a minimum of Rs 500 on an annual basis to open and maintain his account. The maximum permissible deposit per year is Rs 1,50,000. A subscriber can pay the amount either in a lump sum or can make at most 12 installments in a year.
  3. Deposits in the PPF qualify for the tax rebate under the Section 80 C of Income Tax Act.
  4. The government of India decides the rate of interest to be paid on the deposits. Currently, the interest rate is 8.1% (effective from 1 April 2016). The interest amount gets credited on 31st March every year. The interest amount is calculated on the balance (lowest) held in the PPF account between the close of the fifth day and every month’s last day.
  5. The duration of a PPF account is 15 years, but however, on an application by the subscriber, it can be further extended for 1 year or a block of 5 years
  6. Though the lock-in period is 15 years, the whole amount from the PPF can be withdrawn only at maturity. But, however, premature withdrawal can only be made from the end of the sixth financial year, from the period the PPF account was commenced. Also, the subscriber can withdraw only 50% of the balance credited to the PPF account at the end of the fourth financial year preceding the year in which the withdrawal is to be made or at the end of the preceding year, whichever is lower.
  7. The loan facility is available to the PPF account holder from the Third Financial Year up to the Fifth Financial Year. The loan amount cannot exceed 25% of the balance held in the PPF account at the end of the second preceding financial year. Normally, the interest paid on the loan is 1% higher than the interest on PPF account.
  8. On maturity, the credit balance in the PPF account can be withdrawn or can either be extended with or without the contribution.
    • If the subscriber extends the PPF account with no contribution, then he is not required to put any amount after maturity. This option gets activated automatically if the subscriber does not take any action within one year of his PPF account maturity. Any amount can be withdrawn from the account, but however, only one withdrawal is allowed in one financial year.
    • If the subscriber extends the PPF account with a contribution, then he can put amount even after maturity. To avail this option, he is required to submit the form H in the bank with which he has opened his PPF account. With this scheme, the subscriber can withdraw only 60% of the balance held in the account at the beginning of the extended period, within the complete block of 5 years. Again, only one withdrawal is permitted in one financial year.

NOTE: A PPF account can be opened at any branch of the State Bank of India, its subsidiaries or any other specified branches of the nationalized banks and post offices.

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