PPF is one of the many options for investment that is available in the financial market; it is one of the oldest and conventional methods of investment. It was first introduced in India in 1968 with the objective of encouraging small savings through investments along with a return. Read on to know what PPF is and how it works.

What is a Public Provident Fund (PPF)?

Public Provident Fund (PPF) is a long term investment option with an attractive rate of interest and returns on the invested amount. The interest earned and amount received on maturity is not taxable. Any amount invested in PPF can be claimed under section 80c deductions.

How can you open a PPF account?

A PPF account can be opened at the Post Office or any nationalised banks like SBI, Punjab National Bank, etc. Some of the private banks like HDFC, ICICI and Axis Bank are authorised to provide the PPF facility. You will need to submit a duly filled application form to open a PPF account along with the KYC documents – identify proof, address proof and signature proof. Post verification and approval, you can start depositing money into your PPF account.

What is the Interest Rate you will earn?

The Finance Minister decides the interest rate on 31 March each year. The current interest rate is 7.1% p.a which is compounded annually.

What are the Tax Benefits?

The reason why PPF is an attractive investment option is because; the entire principal amount is exempt from tax under section 80C of the Income Tax Act of 1961. However, you should bear in mind that the maximum amount you can invest in one year PPF is 1.5 Lakhs and anything beyond that will not be eligible for tax exemption. Hence, the total amount redeemed on maturity is tax exempt.

Features of PPF –

1. Tenure of Investment – There is a lock-in period of 15 years before which the fund cannot be withdrawn. You can choose to extend the tenure by 5 years after the lock-in period.
2. Investment Limits – You can only invest with a minimum of Rs.500 up to a maximum of Rs 1.5 lakhs annually. The investment can be made in a lump sum or as instalments, though you are allowed only 12 such instalments. You will have to ensure that you invest every year for 15 years to keep the account active.
3. Mode of Deposit – You can make the deposits in the following modes – Cash, Cheque, Demand Draft (DD) or online.
4. Loan against Investment – You can avail a loan against your PPF account between the 3^rd year and the 5^th year. The loan can be only 25% or less of the amount available and has to be repaid within 36 months. A second loan can be availed after the 6^th year if the earlier loan has been repaid.
5. Nominee – Like all bank accounts, you can assign a nominee at the time of opening the account or later on.
6. Eligibility – Any Indian citizen can open a PPF account, NRI and HUF are not eligible to invest in a PPF account. NRIs can continue operating their existing PPF accounts until its tenure completes. One individual is eligible to open only one PPF account unless the second one is for a minor.
7. Account holding – PPF account cannot be opened as a joint account, it can be opened only in the name of one individual.
8. Guaranteed Returns – As PPF is backed by the Government of India, the principal and interest are secure and guaranteed. The risk element is minimal in a PPF account.
9. Withdrawal and Premature closure – As there is a mandatory lock-in of 15 years, only under specific conditions you can withdraw or close the account prematurely. For both, the account should have completed 5 years of tenure. For Withdrawal, you can withdraw a maximum of 50% of the balance credited at the end of the 4^th year. On closing the account prematurely, you will receive 1% less interest from the current interest rate prevailing.