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Public Provident Fund – Details and features
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PPF is a fixed return investment savings scheme offered by Government of India, introduced in 1968 by the National Savings Institute of Ministry of Finance. One can open a PPF account in any of the Nationalized Banks (public and private) or the Post Offices. The banks provide with an option to open the account and deposit the money online, whereas the Post Office does not give them the online facility and hence the customer has to deposit the amount through cash or cheque itself.

As per latest rules, the minimum and maximum amount that can be deposited in your PPF account is Rs. 500 and Rs. 1.5 lakhs respectively. The amount received on maturity is tax-free under Section 80C; however any amount deposited in excess of Rs. 1.5 lakhs in a given year does not earn any interest. The amount has to be deposited in a maximum of 12 installments in a year (not necessarily monthly). In case of failure to deposit the yearly Rs. 500 in the PPF account, the account is marked de-activated and can be re-activated by depositing Rs. 500 and an additional Rs 50 as fine for each year missed.

The interest rates for the PPF savings account are announced on a quarterly basis by the Government. The current rate for the duration October 2018 to March 2019 is 8%. The interest is calculated on the lowest amount between the 5th and the last day of every month. It is compounded annually and paid at the end of each financial year i.e. 31st March.

The maturity period of the PPF is 15 years from the year it is initiated, with a pre-defined option to extend it to a block of 5 years. There is no limit to the number of times one can extend the PPF account. Additionally it is not compulsory to close the account after the period of maturity, and it will continue to earn interest till the time it is retained without making any further deposits.

There are provisions for withdrawal from your PPF account. One can make partial withdrawals up to the 50% of amount in any year after the period of 5 years from the year of subscription, and one withdrawal is allowed in any given financial year.Whereas when the account is in the extension period, one withdrawal is allowed per year up to the amount at the time of maturity. On certain grounds one can prematurely close their accounts; such as- serious/life threatening disease faced by account holder or his/her family, higher education of children. These all withdrawals and closure are tax-free.

Since we have discussed the nitty-gritty’s of a PPF accounts, let’s see how it can be differentiated from a similar investment- Systematic Investment Plan.

  1. Since PPF is backed by the government, it rules out the possibility of default in the payment, unlike mutual funds and other schemes that are subject to market risks.
  2. The returns on PPFs are fixed and guaranteed by the government, whereas other funds/investments are linked to market and performance of their fund managers.
  3. Mutual Funds are more liquid than PPFs as the money in your PPF account is locked for 15 years, with a benefit of taking a loan against your account from 3rd to 6th year.
  4. Mutual Fund returns are taxed based on the scheme and investment tenure, whereas the interest in PPF account is tax free and the investment up to Rs. 1.5 lakh per annum in PPF account is tax deductible.

We can conclude that Public Provident Funds are savings-cum-tax saving instruments which yield in fixed returns over long periods with safety of funds.

 

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