What is Public Provident Fund

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Public Provident Fund or PPF is a well known and often opted for investment option for retirement savings. There are many benefits that a PPF offers over other investment options but the most important benefit that attracts maximum number of investors to this scheme is that the amount invested in the PPF is tax deductible upto 1.5Lakh. Moreover the interest earned from PPF is also tax free. Any Indian is eligible to open a PPF account. Almost every bank offers the service to open a PPF account and you can check with your bank regarding the opening of your account. You can invest a maximum of 1.5Lakh in a PPF account and are required to deposit a minimum of Rs. 500 to keep it active. You can even open a PPF account in the name of your child (minor). However the maximum limit will be Rs. 15 Lakh for your and your minors account combined. You cannot invest 1.5L in your PPF account and another 1.5L in your kid’s (minor) PPF account. Non Resident Indians are also not allowed to open a PPF account. However, if you open a PPF account and then move abroad then you can continue to deposit in that account till maturity. You cannot however extend your PPF maturity date after the due date.

 

Extension Policy – When you first open a PPF account it will have a maturity period of 15 years. At the end of 15 years you have the option to extend the scheme in two ways. In each of these ways the extension is made for a period of 5 years and the extension request has to be made within a period of 1 year from the previous maturity. As of now there is no fixed limit to the number of times that you can extend your PPF account. Following are two ways in which you can extend your PPF account. –

 

  1. While continuing to contribute to the fund – In this case the account holder will have the right to deposit upto 1.5 Lakh rupees into the account and a minimum of Rs. 500 to keep the account active. The account holder will earn interest on both the already built corpus as well as the freshly deposited amount.

 

  1. While continuing the fund but not contributing to it – In this case the account holder does not have to make any new fresh deposits and the account will earn interest on the already invested amount for 5 years.

 

Advantages of investing in a Public Provident Fund –

 

Long term investment fund – The Public Provident Fund has a strict withdrawal policy and does not allow any withdrawals for a long period of time. This makes sure that whatever amount you are investing in your public provident fund will stay secure, grow and only be available to you when it has grown into a decent corpus and after a long time. It is also completely secured and government backed so there is no risk of capital here.

 

Invested Amount as well as Interest is Tax Free – Public provident funds allow you to invest upto Rs. 1.5 Lakh as tax free income. This makes the scheme especially attractive for people willing to claim some tax rebate under Section 80C. Apart from this the interest earned on the scheme is also tax free.

 

Good Returns – The current return rate of the scheme is approximately 7%. If you check the interest rate for the scheme in the past years as well you will find that the scheme has delivered good returns as per the prevailing interest rates and has grown a good retirement fund for all those who chose to invest. The rates of these schemes change often and you should check the rate whenever you are planning to invest, however, it would not make sense to worry too much about the rates since they can change massively by the time your scheme matures. It is better to find comfort in the fact that the government has always kept interest rates for the scheme at levels in sync with the prevailing interest rates and inflation rates and hence are going to be beneficial for you in the long run.

 

Withdrawal Policy – The withdrawal policy for Public Provident Funds is extremely strict and this is one of the drawbacks of the scheme. Following are some of the basic rules regarding the withdrawal policy in this scheme, please check their website for a complete guide on their withdrawal policy.

 

  1. You cannot withdraw any money from your Public Provident Fund account under any circumstance for the first 5 years of this scheme and since the years are counted from the end of the first financial year of investing in the scheme this number ends up 7 years effectively.
  2. After 7 years, you are eligible to make partial withdrawals however you can make only 1 withdrawal in a single financial year.
  3. The maximum partial withdrawal allowed is only 50% of the corpus available in the previous financial year.
  4. You can withdraw the complete amount only after 15 years.
  5. In case of an extension you can withdraw any amount however you are allowed to withdraw only once in a financial year. Also, this rule is only applicable if you have opted for the extension in which you do not invest any additional funds.
  6. In case you opt for the extension in which you are depositing additional funds you can withdraw only 60% of the funds available at the time of start of the extension period.
  7. These rules might change from time to time and we recommend you to check for the latest updates on the official website.

 

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