Your Guide to Understand Public Provident Fund

Public Provident fund is a long-term saving scheme offered by the government. Usually, for salaried employees, companies offer this provident fund option where a small amount of salary is sent directly to the employee’s PF account. However, that is not the ideal scenario for everyone. There are so many organizations that don’t offer this facility and also self-employed people won’t be able to do it.

To provide a saving source for people who are self-employed or don’t have a PF facility despite having a regular source of income, the Central government has launched this Public Provident Fund option. This is meant to be an aid for the people post their retirement. Let us understand more about PPF in the article.

Brief Overview

PPF is very tax efficient and meant to be one of the long-term saving schemes where people can save a certain amount until the time they retire. It helps in creating a retirement corpus. The interest that one earns in this PPF scheme is not taxable, hence making it a great savings option. Here are some of the important details related to PPF-

  • Indian residents are liable to open a PPF account. If a person has EPF but also wants to save in PPF, they can do that without any restrictions.
  • PPF accounts can be opened in so many banks starting from State Bank of India, Post Offices, Axis Bank, ICICI Bank, HDFC Bank.
  • The PPF account is supposed to be opened for a minimum of 15 years and then you can increase the time period in 5-year multiples.
  • After the completion of 5 years, there is an option to close the account prematurely. 
  • The government pays interest on a yearly basis on the amount that is deposited in the PPF account. This interest percent is around 8% and keeps varying with years.
  • In one financial year, a person can deposit an amount from 500 to 1,50,000 in their PPF account. There is no particular restriction as to how much you can deposit in one financial year, for example, if you deposit 30,000 last year and deposit 20,000 this year, it is completely okay.
  • One can withdraw 50% of their last year’s closing balance in any emergency case.
  • After three years of account, one can withdraw a loan and this is restricted to 25% of the balance present in the PPF account.

Investing Amount in PPF

The financial year starts on April 1st of this year and ends on March 31st of next year from April 1st, 2020 to March 31st, 2021. You need to credit the required amount in your PPF account before the 5th of every month. The interest of every month is calculated on the 5th and if you lose out paying it by the 5th, you will lose that month’s interest.

If you are someone who is providing a draft or cheque, ensure that it is cleared before the 5th of the month. If it isn’t you won’t get interest in that month.

Here is how the interest will be calculated. If you have deposited an amount of 20,000 this month before the 5th, then by the end of this month the lowest balance at any given point of time in your account is 1,40,000, then the interest for that month is 1,026.67. However, this interest is added at the end of the year only.

Now next year’s interest is compounded by this month’s interest. As in, the interest is added for the entire amount (your deposit+interest earned last year). Isn’t it a great deal?

Is it Safe?

By investing in the PPF, you are trusting none other than the government itself. The government isn’t going to run away with your money right away, so the amount that you are saving in your PPF account is definitely safe and secure.

PPF-Liquidity

This is one thing where PPF loses. When it comes to liquidity, your amount is locked in the account for 16 years (the year you start saving+15 years). Although there are premature withdrawal options, you wouldn’t be able to get your hands on the entire amount along with interest until 16 years are over. 

Premature Closure of PPF

You can opt to close your PPF account after 5 years since you have opened it. There should be a valid reason for the closure of the account such as some ailment, higher education or marriage of children, change in the residence, etc. You can approach the bank or institute with whom you have the PPF account and carry out the procedure.

Cash Withdrawal from your PPF account

You can withdraw the amount from your PPF Account after 6 years. This means that you have to wait for six financial years after your first subscription. You will be able to withdraw 50% of the amount present in the PPF account and once you withdraw it, you won’t be able to repay it. However, there is a small twist to it, and read this carefully.

If you have started saving in a PPF account on April 1st, 2003, you can make the first withdrawal after April 1st,2009. Here you are supposed to withdraw 50%, however, this 50% of the balance can be of 31st March 2005 (fourth year since you have opened the account) or 31st March 2009 (sixth year since you have opened the account)- whichever of these is lower.

Hope you understood this example. If you haven’t read it again.

PPF Loan

If you have any sort of emergency and want to take a loan against your PPF amount, you can do that too. You can take a loan from the 3rd year of your account opening until the 6th year. You will be liable to take a loan of 25% of the amount that you have in the PPF account and repay it in a maximum of 36 EMIs. The interest of 1% on the prevailing PPF rates is levied on a yearly basis. For example, if your PPF interest rate is 8%, you have to pay 9% interest on the loan that you take per annum. 

If you fail to repay, 6% extra interest is levied.

Maturity of PPF

Now, let us talk about the maturity of your PPF account. Upon completion of 16 years, you will have an option to withdraw the entire amount including interest. If you want to extend the account period, you can do so. The maximum time period for an extension is 5 years. In these 5 years, you can just earn more compounded interest on your amount or keep depositing the amount into the account. Once this 5-year extension is over, you can add another 5 years if you want and the list goes on.

If you are looking for the safest long-term saving option, then there is no better choice than PPF. Your amount will be compounded and at the same time, the amount is in safe hands. You can build a reliable corpus fund for your retirement with PPF. 

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