We all have heard a lot about PPF Account and seen our parents make investment but what is PPF Interest Rate in India and what are the benefits of investing in this form of Instrument? This is one question which usually crops up in our minds and in this article we have tried to explain the basics and the benefits of investing in this form of Tax-Saving Instrument.
- Recommended Read: 8 ways to save tax legally through Tax Planning
What is PPF?
PPF Account refers to Public Provident Fund Account and is a Long Term Debt Scheme of the Govt. of India on which regular interest is paid. Any Individual in India (whether Salaried or Self-Employed or any other category) can invest in this scheme and can earn a handsome tax-free return on the same which is usually higher than the return offered by Banks on Fixed Deposits.
Public Provident Fund can be opened in any Post Office and some authorized branches of Banks. Many Individuals have expressed a preference towards maintaining a PPF Account in a Bank as compared to a Post Office as Banks permit online deposits in your Public Provident Fund whereas Post Offices don’t provide this facility.
Non Resident Indians (NRI’s) are not allowed to invest in Public Provident Fund. However, if someone opens a Public Provident Fund while he is a Resident of India but subsequently becomes a NRI, he shall be allowed to continue investing in his account.
PPF Account can be opened on behalf of a minor either by father or mother, but both cannot open this type of account on behalf of a minor. Grand Parents cannot open public provident fund account on behalf of a minor. However, in case of death of both the parents, the grand parents can act as a guardian of the minor and open an account.
Maximum and Minimum amount to be deposited in PPF each year
As per the Public Provident Fund Scheme (Amendment Rules 2014), at the time of opening an account for the 1st time, either on his own account or on account of a person for whom he is a guardian shall apply in Form A, togethor with the initial amount of subscription i.e. Rs. 100.
On receipt of the application form, the Accounts Officer shall open the account and issue a passbook in which all entries related to deposits, loans, withdrawls should be stated. In case of Online Banking, a Statement of Account should be issued in place of the Passbook at the discretion of the account holder.
Although a PPF Account can be opened with Rs. 100, as per the Public Provident Fund Act, 1968 framed by the Govt of India, the Minimum amount to be invested in this account every year is Rs. 500 and the Maximum amount that can be deposited in a PPF Account every year earlier was Rs. 1 Lakh. This limit has been increased from Rs. 1 Lakh to Rs. 1.5 Lakh in the Interim Budget 2014 presented by Finance Minister Arun Jaitley on 10th July 2014.
Every subscription shall be made in Cash/Crossed Cheque/Demand Draft/Pay Order/Online Transfer in favour of the Accounts Officer at the place at which that office is situated.
If a Public Provident Fund Account Holder does not deposit Rs. 500 every year in his account, a penalty of Rs. 50 each year would be levied along with the arrears of subscription of Rs. 500 for each such year.
This amount may be paid in 12 monthly instalments or in lump-sum at the option of the Account Holder. Earlier HUF’s were also allowed to invest but now HUF’s are not allowed to invest in Public Provident Fund. RBI has also announced that if any HUF had opened a Public Provident Fund Account prior to 13th May 2005, they would be allowed to continue and would be closed on expiry of 15 years from the date of opening the account
- Recommended Read: How to Save Taxes by forming a HUF
PPF Interest Rate
The PPF Interest Rates are benchmarked against the 10-year Government Bond Yield and is 0.25% higher than the average Govt. Bond Yield. PPF Interest Rates were earlier revised annually but from 2016 onwards, these rates are revised quarterly.
PPF Interest is computed for a calendar month on the basis of the lowest balance in an account between the close of the 5th day and the end of the month and the Interest on PPF Account is credited to the account of the account holder at the end of the year.
PPF Interest Rate for the current and the past few quarters is given in the table below
|Period||PPF Interest Rate|
|Jan – Mar 2018||7.6%|
|Oct – Dec 2017||7.8%|
|July – Dec 2017||7.8%|
How to earn maximum PPF Interest
As explained above, Interest on PPF Account is computed on a monthly basis depending on lowest balance in your account between 5th and end of the month. Therefore, if you don’t deposit any additional amount in your PPF Account before 5th of the month, you wont be earning any interest on such additional amount. In such a case, your lowest monthly balance would be on 5th and irrespective of the amount you deposit after 5th of the month, you won’t be earning any interest on such additional amount.
Therefore, it is always advisable to make all additional deposits before the 5th of every month so as to earn maximum interest on such additional amount.
The ideal way to earn the maximum possible interest on ppf account would be to deposit Rs. 1.5 Lakh before 5th April so that you can earn interest on the whole 1.5 lakh for the complete financial year. A one-time deposit made at the beginning of the year will help you earn maximum possible interest.
In case you intent to deposit small amounts every year, try to do the same before 5th of the calender month as explained above. to explain in figures, if you deposit Rs. 10,000 before the 5th of every month for the next 10 months, you would earn Rs. 75 extra per month which would lead to Rs. 750 every year. If this amount is deposited after 5th, you won’t be able to earn this additional ppf interest.
The Interest on your PPF Account would also be computed in the same manner as discussed above. To compute the PPF Interest, you can also refer to this PPF Calculator prepared by Manish Chauhan of Jagovestor.com
Tenure of Public Provident Fund
PPF in India can be closed at any time after the expiry of 15 years from the date on which it was opened. The whole amount in this account can be withdrawn at the time of Closure. For Closure of account, the account holder shall apply in ‘Form C’ and also furnish the Pass Book of his Account.
Extension of PPF Account – However, on the expiry of 15 years, the Account holder can also apply for extension of duration for a further time period of 5 years. In case an account holder opts for extension, he shall also be eligible for Partial Withdrawal by applying in ‘Form H’, subject to the condition that the total of the withdrawals during the extended 5 years shall not exceed 60% of the balance in his account at the time of extension.
Pre-Mature Withdrawal from Public Provident Fund – There is a lock-in period of 5 years and an Account Holder can withdraw money only at the end of the 5th year. The maximum amount that can be withdrawn is 50% of the amount that stood in his account (whichever is lower among the following two): –
- At the end of 4th year or
- At the end of the previous year in which Withdrawal is sought to be made
If the Account Holder has taken any Loan against this amount, it shall also be deducted from the above figure computed above.
With effect from 1st April 2016, pre-mature closure of PPF Account has also been allowed in certain genuine cases like serious ailment of the account holder, spouse, children or parents, or if the amount is needed for higher education.
However, this option would only be available to those accounts which have completed 5 years from the date of opening. Moreover, a penalty of 1% reduction in interest would also be levied on the whole deposit.
Loans on PPF Account
Loans can be availed from the 3rd financial year excluding the year of deposit. Amount of such loans must not exceed 25 percent of the amount that stood to the account holder’s credit at the end of the second year immediately preceding the year in which the loan is applied for.
A fresh loan is not allowed when a previous loan or interest is outstanding. Interest Rate is 1% if repaid within 36 months and at 6% on the outstanding loan after 36 months. The repayment may be made either in lump-sum or in installments.
Tax Benefit of Investing in Public Provident Fund
The amount reflected in the Public Provident Fund Account consists of 2 parts, firstly the amount which you have deposited in this account i.e. the Principal Amount and secondly the Interest that has been earned on this amount deposited.
The tax benefits for investing in this account are available for both the Principal component and the Interest component.
- Tax benefits on the Principal component: The amount deposited in this account can be claimed as a deduction from the Gross Total Income under section 80C at the time of filing of income tax return. The amount that can be claimed as a deduction under section 80C is limited to a maximum of Rs. 1.5 Lakh p.a. (Increased from Rs 1 Lakh to Rs 1.5 Lakh in the Budget 2014). The total taxable income computed after deduction under section 80C is liable to tax as per the income tax slabs of the taxpayer for that year.
- Tax benefits on the Interest on PPF Account: The interest on PPF Account is also exempted from the levy of income tax. In other words, no income tax is levied on the interest on PPF Account and this income is tax free.
PPF Account vs Tax Saving Fixed Deposit
Another Fixed Interest earning Investment which is allowed to be claimed as deduction under Section 80C is Tax Saving Fixed Deposit. Both Public Provident Fund and Tax Saving Fixed Deposits are allowed as deduction under Section 80C upto a maximum limit of Rs. 1.5 L p.a.
The maturity of Tax Saving FD is 5 years as compared to maturity of Public Provident Fund which is 15 years. But the interest earned on Tax Saving Fixed Deposit is taxable as compared to interest earned on PPF Account which is tax free.
The following article throws more light on the same and explains when investing in Public Provident Fund is advisable and when investing in Tax Saving FD is advisable
- Recommended Read: Should you be investing in PPF or Tax Saving Fixed Deposit?
PPF Account vs National Savings Certificate (NSC)
Both Public Provident Fund and National Savings Certificate (NSC) are schemes wherein deposits are made in the Post Office/specified banks but are backed and maintained by the govt. However, the major difference between these two is that National Savings Certificate is a one time deposit scheme whereas in Public Provident Fund you have to invest a minimum specified amount every year so as to keep the account active.
The Maturity period of National Savings Certificate is also lower i.e. 5/10 year as compared to the maturity of the Public Provident Fund which is 15 years
- Recommended Read: Features of National Savings Certificate
Other Points to Note
- Investors are requested to note that each individual is eligible for only 1 PPF Account per person. If an Individual is detected with having more than 1 Account (except when on behalf of minor), then the 2nd Account would be closed and the entire amount invested shall be refunded. Only the principal amount will be refunded and the Interest thereon will be forfeited
- Public Provident Fund can only be opened in Individual’s Name and not in a Joint Name. However, a nominee can be appointed for the Public Provident Fund. On the death of the Account Holder, the nominees cannot make any additional contribution on the death of the deceased.
- If the Account holder dies and no nominee has been appointed by him, the amount deposited in his Public Provident Fund Account would be awarded to his Legal Heirs.