Know about PPF Rules

Since its launch, the Public Provident Fund (PPF) scheme has been very popular among investors. The high rate of interest and the tax benefits provided by the scheme make it very popular. Some of the main benefits of the PPF scheme are mentioned below:

  • Rate of interest of 7.1% p.a.
  • Tax benefits of up to Rs.1.5 lakh
  • Loans can be availed against account
  • Nominees can be added

However, there some very important rules that individuals must know about before investing in the PPF scheme. The main rules of the scheme are mentioned below:

  • Eligibility criteria: The eligibility criteria for investors who wish to invest in PPF scheme are mentioned below
      • Only Indian residents are allowed to invest in the scheme.
      • Joint account cannot be opened.
      • Parents or a court-appointed guardian can open a PPF account on behalf of a minor.
      • In case both the parents are dead, grandparents can open a PPF account on behalf of their grandchildren.
      • An individual can open only one account under his/her name.
      • Body of individuals, Hindu Undivided Families (HUFs), and Non-resident Indians (NRIs) cannot invest in a PPF account.
  • Duration: The duration of the PPF account is 15 years. However, the maturity date is considered from the end of the financial year from when the contribution is made. The maturity period does not depend on the date or the month from when the account was opened. Therefore, in case an individual made the initial deposit on 1 September 2010, the calculation of the maturity period will begin from 31 March 2011, and the account matures on 1 April 2026.
  • Number of contributions: In case individuals make one contribution a year, the total amount of contributions that must be made is 16 because the maturity period is calculated from the last day of the financial year.
  • Contributions that can be made: The minimum and maximum contribution that can be made in a financial year are Rs.500 and Rs.1.5 lakh, respectively. The maximum limit of Rs.1.5 lakh is combined for both the accounts in case an individual has opened an account on behalf of a minor as well. Contributions can be made in a lump sum or in a maximum of 12 instalments.
  • Calculation of interest: Currently, the PPF rate of interest is 7.1% p.a. In order to make sure that the payment is received, it is important that individuals make the contributions towards the scheme by the fifth of every month. The payment can be made in the form of cheque or cash. Calculation of interest is considered from the fifth day of the month to the last day of the month.
  • It is recommended that individuals make the payment by April 5 of every year in case the deposits are made in a lump sum. Calculation of interest is done on a monthly basis. In case individuals pay more than Rs.1.5 lakh, no interest will be generated for the excess amount.

  • Partial withdrawals and loans: Even though a PPF account has a 15-year lock-in period, individuals can make a partial withdrawal and avail loans against the account under certain conditions. Partial withdrawal and loans depend on the number of years and the balance that is available in the account.
  • In case individuals wish to avail a loan, the interest that is charged is 2% more than the interest that is earned for deposits made to the account. The principal amount is added back to the account of the subscriber. However, the interest that is being paid will be given to the government. In case the subscriber has already availed a loan, they will not be able to take another loan until the first loan has been paid off.

    Once individuals are allowed to make partial withdrawals, they will not be able to avail a loan against PPF account. Account holders are eligible to make partial withdrawals from the seventh year. In a financial year, subscribers are allowed to make one withdrawal.

  • Tax benefits: Under Section 80C of the Income Tax Act, individuals can avail tax benefits for contributions made towards the account. The interest that is generated from the contributions is also tax exempt. In case individuals make a PPF premature withdrawal, the amount that is withdrawn is tax exempt as well. However, individuals will have to declare that a PPF withdrawal has been made when filing Income Tax Returns.
  • Discontinuation of account: In case subscribers discontinue their PPF account, they will not be able to make withdrawals or avail loans against the account. In order to avail these facilities, the PPF account must be brought back to active status by making the minimum contribution and paying the penalty that has been levied. However, the interest will be generated on the balance that is available even if the account is discontinued.
  • Extension of account: After the tenure of the account, individuals will be able to extend the maturity period of the account in blocks. Each block consists of 5 years and there is no limit to the number of times individuals can extend their account. However, individuals will need to inform the bank or post office of the extension at least one year before maturity. Interest will also be generated on the balance present in the account even if no contributions are made after the extension.
  • During the extension period, individuals are allowed to make one withdrawal every financial year. However, the maximum amount that can be withdrawn is 60 percent of the amount that is available at the time of the extension.

  • Wealth Tax exemption: Contributions made towards the PPF account are exempt from Wealth Tax as well.
  • Premature closure: Only under certain conditions, is premature closure of PPF account allowed. However, premature closure is allowed only 5 years after the account has been opened.
  • Court decree: Individuals cannot attach the PPF account to pay off a liability or debt. A court order or decree cannot allow an individual to use the money available in the PPF account to pay off their debts.
  • Penalty: In case individuals do not make the minimum contribution of Rs.500 towards the scheme, the account will become inactive. In order to bring the account back to the active status, an Rs.50 penalty will have to be paid every year for the number of years the account has been inactive. The minimum contribution must also be paid along with the penalty.
  • Addition of nominees: Nominees can be added at the time of opening the PPF account or during the tenure of the scheme. Account holders can also add minors as nominees. However, in case the PPF account has been opened on behalf of a minor, nominees cannot be added.
  • Transfer of account: Account holders can transfer their PPF account from a post office to a bank and vice versa. Similarly, the PPF account can be transferred from one bank branch to another.

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