Public Provident Fund (PPF) has been a preferred investment destination for many investors for many years. It is one of my favourite tax-saving products too.
Apart from the attractive tax-free interest rate, PPF investments also get a favorable tax treatment. PPF falls under Exempt-Exempt-Exempt (EEE) tax regime. I have covered several such aspects of PPF account in some of my earlier posts. In one of the posts, I discussed how PPF can be used as a pension instrument. In other posts, I discussed PPF accounts for children and facility of loans against PPF account.
In this post, I will consolidate various aspects of other posts and also try to answer some common queries about PPF accounts.
#1 How many PPF accounts can I open?
You can open just one PPF account. If two accounts have been opened, the second account will be considered irregular. Balance in the second account will not earn any interest unless the two accounts are amalgamated with approval from the Ministry of Finance. You cannot open PPF account under joint names.
#2 Is there a maximum age for opening PPF account?
There is no maximum age for opening a PPF account.
#3 Where can I open a PPF account?
You can open a PPF account with a post office. Alternatively, you can open a PPF account with any prescribed public sector banks (SBI, Union Bank, PNB, IDBI etc) and a few private sector banks (ICICI Bank and Axis Bank).
A few banks allow you to open PPF account online too. You can transfer your PPF account from post office to a bank or vice-versa. You can also transfer from a bank to an another bank or one post office to another.
#4 What is the interest rate payable?
The interest rate for the PPF account is notified every year by the Government of India. Your PPF balance earns the interest as notified by the Government every year quarter. Interest rate (as on October 7, 2021) is 7.1% p.a.
For the latest update on interest rates for various small savings schemes such as PPF, SSY and SCSS, please refer to this link.
PPF interest is calculated monthly on the lowest balance between the end of 5th day and last day of the month. However, total interest earned during the year is credited to your PPF account at year-end only. So, there is no compounding on monthly basis.
To sum up, interest on PPF balance is calculated on the balance as on 5th of every month (unless you make withdrawals after 5th of a particular month). Hence, if you make a contribution on 6th June, your contribution in the month of June will not earn any interest for the month of June. Rest of the balance (apart from a deposit on 6th) will earn interest for the month of June.
#5 What is the maximum and minimum contribution per year?
Minimum contribution per financial year: Rs 500
Maximum Contribution per financial year: Rs 1.5 lacs.
Minimum amount per installment: Rs 5.
You can make a maximum of 12 deposits per financial year.
#6 Can NRIs open PPF account?
NRIs cannot open PPF account.
However, accounts opened before becoming NRIs can be continued till maturity on non-repatriation basis. NRI are not allowed to extend PPF account beyond initial maturity of 15 years (or expiry of extension block of 5 years). Amount deposited after maturity shall be refunded to the depositor without interest.
For the accounts that were opened before becoming an NRI, such accounts need to be closed when you become NRI (as per FEMA). If you do not close the account, your PPF balance will earn a return of 4% p.a. from the say you became NRI.
For more on this topic, please refer to this post (NRIs need not close their PPF accounts).
#7 When does PPF Account mature?
PPF account matures 15 years from the end of financial year in which the PPF account was opened. For example, if you opened the account on June 28, 2012, your PPF account will mature on March 31, 2028.
At maturity, you can have three options:
- Close your account and withdraw the entire accumulated amount
- Extend PPF account for a further period of 5 years without any further contribution
- Extend PPF account for a further period of 5 years with further contribution
#8 Can I continue my PPF account beyond 15 years?
After the initial maturity period of 15 years, you can also extend the account in blocks of 5 years any number of times. While extending, you have two options. You can extend the account with contribution or without contribution.
a. Extension without further Contribution
After the completion of 15 years (or the end of extension block of 5 years as the case may be), you have to specify the extension option within one year of expiry of initial maturity. Under this option, you will not be able to make any further contributions to your PPF account.
Please note this is the default option. If you do not close the account after maturity or extend it with contribution within one year, your PPF account will be extended under this option automatically.
Once the PPF account is renewed without contribution, you cannot switch back to with contribution mode (even after expiry of extension block of 5 years). The balance in the PPF account continues to earn interest.
You are allowed one withdrawal per financial year. In this case, there is no limit on the amount that you can withdraw from your PPF account. You can even withdraw 80% or 90% in the first year itself. However, only one withdrawal from PPF account is permitted per year.
b. Extension with Contribution
Under this option, you will have to make regular contributions to PPF for another five years (just as you had to during the initial maturity period).
There is some relaxation in withdrawal rules on the extension of PPF account. You can withdraw up to 60% of the balance amount at maturity in the next five years. The restriction of a single withdrawal per year applies in this case too.
For example, if you PPF account has Rs 50 lacs at the time maturity (completion of 15 years) and you choose to continue the account with further contribution, you can withdraw a maximum of Rs 30 lacs from your account in the next 5 years. Apart from this, there is no other restriction on withdrawal. You can even withdraw Rs 30 lacs in the first year itself. However, in such a case, you won’t be able to withdraw anything from your account in the next four years.
Please note you have to subscribe for this option within one year from the maturity of the account. If you don’t do so within the specified timeline, your account would be automatically extended without contribution, which is the default option.
You must specify the option by submitting Form H with the post office/bank. If you continue to deposit money in your PPF account without submitting Form H, you will not earn any interest on this deposit. Such deposits will also not be eligible for tax benefit under Section 80C. Hence, submission of Form H is mandatory if you want to extend your PPF account with contribution.
#9 Can I withdraw money from my PPF account before 15 years?
Before the completion of initial maturity period of 15 years, premature withdrawals can be made after the expiry of five years from the end of financial year in which the initial subscription was made i.e. if the account was opened in July 2004, you can do a partial withdrawal from April 1, 2010.
The maximum amount that can be withdrawn prematurely is capped at 50% of the PPF account balance (four years prior to the year of withdrawal) or the PPF account balance in the preceding financial year, whichever is lower.
In the example given above (from April 1, 2010), you can withdraw 50% of balance amount as on March 31, 2007 or 50% of the balance amount as on March 31, 2010, whichever is lower.
From April 1, 2011, you can withdraw 50% of balance amount as on March 31, 2008 or 50% of the balance amount as on March 31, 2011, whichever is lower.
After the initial maturity of 15 years, withdrawal rules become a bit lenient. These rules have already been discussed in section Maturity Rules for PPF Account. In case of extension with contribution, you can withdraw 60% of the PPF balance at the time of maturity in the next five years. In case of extension without contribution, there is no restriction on withdrawal. However, in either case, only one withdrawal is allowed per year.
#10 Premature Closure of PPF Account is now permitted
Premature closure of PPF Account is now permitted subject to a few conditions. PPF account can be closed after 5 years for medical treatment of family members and higher education of the account holder. However, the premature closure comes with a penalty of 1% of interest rate for all the years you have been invested in PPF. Read more about premature closure of PPF account here.
#11 Can I take a loan against the balance in my PPF account?
You can take a loan from your PPF account one year from the end of financial year in which the account was opened (initial subscription was made) but before the expiry of 5 years from the end of financial year in which the initial subscription was made. The maximum loan amount is 25% of the PPF balance at the end of the second year immediately preceding the year in which the loan is applied for.
Suppose you open your PPF account in October 2014, you shall be eligible for the loan facility from April 1, 2016. You can avail the facility till March 31, 2020. From April 1, 2016 to March 31, 2017, you can avail loan up to 25% of your PPF balance as on March 31, 2015. Similarly, From April 1, 2017 to March 31, 2018, you can avail loan up to 25% of your PPF balance as on March 31, 2016. And so on. From April 1, 2020, you will be eligible for withdrawals from your PPF account. Hence, no further loans are allowed.
Interest rate applicable is 2% p.a. is above the prevailing PPF interest rate. The loan has to be repaid within 36 months. The way PPF loan is repaid is quite different from normal loans are repaid. You can go through the following post to know more about the repayment process.
You are allowed to take loans till such time you cannot withdraw from the PPF account. Since withdrawal is allowed from the 7th year (5 years after the end of financial year in which the PPF account was opened), no loan facility shall be available from the 7th year.
For more on loan on PPF accounts, please go through this post.
#12 PPF Act and Income Tax Act
Please understand PPF is governed by PPF Act, 1968. Income Tax treatment of PPF investments, interest earned and withdrawals is governed by Income Tax Act.
Contribution to self PPF account or PPF accounts of spouse and minor children qualifies for deduction under Section 80C of the Income Tax Act. The total deduction that can be taken by an individual is limited to Rs 1.5 lacs per financial year. Please note the Income Tax Act does not put any limits on how much you can put in PPF accounts. It only tells you about the tax treatment.
It is the PPF Act that limits contribution to (or investment in) self PPF account and PPF accounts of children (where you are the guardian) to Rs 1.5 lacs per financial year.
#13 Can I open PPF account in the name of my children?
A parent/guardian can open an account for his/her minor children. Either parent can open the account in the name of a child. However, both cannot open in the name of same child. For more on PPF account for children, please go through this post.
#14 What if I deposit more than Rs 1.5 lacs per financial year?
As per PPF rules, you can deposit a maximum of Rs 1.5 lacs per year in your account (including any account, where you are the guardian).
You give this declaration while opening PPF account. If the annual contribution to PPF account exceeds Rs 1.5 lacs, you will not earn any interest on the excess amount. This is clearly specified in PPF Act too.
It is possible that you can get away with depositing more than Rs 1.5 lacs in your PPF account and your children’s PPF account (where you are the guardian). However, with technological advancements, it is quite difficult. If you are caught, there is no recourse. The law is quite clear. The excess amount will not earn any interest.
There is a workaround. If you have two children, you can be a guardian in PPF accounts of one of them, while your spouse can be a guardian in PPF account of the other child.
Total contribution under your PPF account and PPF account of the first child shall not exceed Rs 1.5 lacs per annum.
Similarly, total contribution under your spouse’s PPF account and PPF account of the second child cannot exceed Rs 1.5 lacs. If your spouse is working and makes PPF contribution out of own funds, he/she can also avail tax deduction of Rs 1.5 lacs under Section 80C. This way, you can contribute Rs 3 lacs per annum in PPF account.
There is a way in which you can invest more than Rs 3 lacs in PPF accounts (for the family; self, spouse and kids) if you are a dual income household. However, even though tax laws allow this, the approach does not seem right to me in spirit. I won’t discuss the trick in this post. More on this in another post. By the way, whether you should invest more than Rs 3 lacs in PPF (or even Rs 3 lacs) is also a question you need to answer.
#15 What if I deposit in my spouse’s PPF account?
If you deposit Rs 1.5 lacs in spouse’s PPF account, PPF Act has no problem. Your spouse is a major. You cannot be guardian in your spouse’s account. As per PPF account, it is a separate account and your contribution to your wife’s PPF account won’t be considered while calculating your total contribution to PPF account (as per PPF Act). So, you can put Rs 1.5 lacs in your PPF account and Rs 1.5 lacs in your spouse’s PPF account. Income tax benefits (to you) in this case will be limited to Rs 1.5 lacs per financial year.
However, if your spouse makes a contribution to her PPF account out of own funds, he/she can also avail separate tax deduction under Section 80C. So, tax benefits of up to Rs 1.5 lacs each under Section 80C to both of you.
#16 Tax benefits for PPF
PPF falls under Exempt-Exempt-Exempt (EEE) tax regime. Investment in PPF account up to Rs 1.5 lacs per financial year is eligible for deduction under Section 80C of the Income Tax Act. Interest earned is not taxable. Any withdrawal from PPF account is also not taxed. Maturity amount from PPF account is also exempt from tax.
#17 You can smartly use your PPF account as a pension tool
Once your PPF account completes 15 years, it becomes extremely flexible in term of withdrawal. We have already gone through PPF extension rules above. If you are retired, you can smartly use your PPF balance as a pension tool. For more on this, refer to this post.
In this post, I have tried to address many common queries about Public Provident Fund (PPF) accounts. If you want me to address any other query, do leave your query in the comments section.