Public Provident Fund (PPF) - Maturity, Benefits, Alternatives

Public Provident Fund or PPF – All you wanted to know

Roboadviso     Interesting Articles     Posted On, Thu 26th July, 2018     No comments

Even after so many years, PPF (Public Provident Fund) has maintained its stronghold as being the preferred investment tool for a lot of investors. The amount that is invested into PPF as well as the returns accrued in the form of interest are both guaranteed by the sovereign state. Additionally, as per section 10 of the 1961 Income Tax Act, the interest gained from PPF is not taxable and investors get the full amount. The money put in as the principal in the fund also comes with the benefit of deduction under Section 80C of the IT Act, 1961.

The rate of interest on fixed income taxable instruments is slowly reducing. However, PPF continues to be a great alternative to the debt part of the investment allocated in the portfolio. The current interest earned via investments in PPF is 7.6 percent per annum. It may be noted that the government regularly resets (or may not reset) the rate of interest, every quarter.

Public Provident Fund is a scheme of 15 years and it comes with the option of indefinite extension by a block period of 5 years. One can open a PPF account in a bank branch or a designated branch of the post office. Some banks also offer the option of opening a PPF account online through their website. A PPF account can be opened by any individual of any age.

  • People can deposit money into the PPF for not more than 12 times per year. It is however important to make the deposit before the fifth of every month so as to receive the interest for the entire month. This is because the interest is calculated according to the lowest remaining credit balance of a PPF account, from the business day closing of the fifth of every month to the end-day of that month.

When the PFF account reaches the maturity period, then the investor needs to decide where the total money accrued needs to be deployed. PPF accounts come with a maximum investment amount of INR 1, 50,000 per year. Thus, it is not possible to reinvest the full amount accrued on maturity into a new PPF account. Investors have the option of extending the current PPF account that has reached maturity by a pre-defined period of 5 years after maturity. You can continue to put money into this account, post extension of 5 years, or just keep the investment as is with full amount that was accrued till maturity.

  • Investors can keep making new deposits into the matured and subsequently extended PPF account for the new 5-year period in the same manner as they did for the 15 years before the account reached maturity. Investors however need to intimate the Account Office of such new deposits in writing by duly completing the Form H. In case new deposits are continued to be made into the account without the filling up of the Form H and its submission to the Account Office, then such fresh deposits will be considered as abnormal and they will not accrue any kind of interest. Additionally, the IT Act’s Section 80C associated tax benefits will not be applicable to such new deposits made without submission of the Form.
  • It is possible for investors to continue their PPF accounts after maturity without putting in any new deposits. In such a case, they will continue to earn tax-free interest income from the PPF investment.

There is no loan facility available with a PPF account for the first two years. It can only be availed from the 3rd year onwards. Additionally, investors can opt for partial withdrawals only after 6 years have passed. These restrictions are not applicable during the extension period post maturity of a PPF account.

  • Investors who have gone for extension of their PFF account without making any new deposits are allowed to make 1 withdrawal from the account per year for any sum present as credit in the PPF balance. The amount that remains in the account after such a withdrawal keeps earning interest.
  • Investors who have opted for extension along with new deposits into the extended PPF account can make only “1” partial amount withdrawal from the account, during the entire 5 year extension period, by filling Form C. Such a withdrawal is however subject to the condition that the sum that is withdrawn during the extended block period cannot be more than 60 percent of the credit balance that was present in the PPF account at the time of start of the extended 5 year period.
    • The “1” partial withdrawal can be made in one year as one installment, or it can be made over different financial years in one or more installments according to the needs of the investor. In the same fashion, during the second 5-year block period extension, investors can withdraw a sum of not more than 60 percent of the money remaining as credit in the account at the time of commencement of the second extension. The withdrawal can be made in 1 installment in 1 year or in varied years but limited to just 1 withdrawal per year. Such restrictions to withdrawals are applicable on the start of every PPF account extension for a period of 5 years.

Public Provident Fund is a really good tax saving investment option, particularly as compared to investments in debt funds. It may however be noted that PPF is limited by the constraints placed on liquidity and reduced returns, especially when compared to investments in equity funds.

  • As opposed to PPF, Equity Linked Savings Schemes (ELSS) comes with a lower period of lock-in and with a potential of increased returns. ELSS however carries some short-term volatility. If a person has used up the maximum deduction limit allowed under Section 80C, prior to investing in ELSS or PPF, then she/he may look into investments in equity mutual funds (MFs) as long as she/he does not require regular income through his/her investments. Mutual Fund investment schemes are also tax deductible. Additionally, as their portfolio consists of pure equities, investors can look forward to earning returns (in the middle term) that are well over the returns accrued as interest from PPF. Equity schemes however carry the risk of sporadic volatility.
  • Investors can also use the amount accrued on maturity of a PPF account after the initial 15-year period to payout all interest-taking liabilities such as education loans, home loans, etc. Home loans come with an 8.5 percent to 9 percent per annum interest rate on average. Even though the interest on home loans is tax deductible, if a person has already used up the limit of such deduction and has to pay tax on interest accrued on PPF, then the PPF amount can be used by him/her to pay off the home loan, etc., and thus save the taxes charged on the interest earned on PPF investments. It is important to note that this option of using PPF money post 15 years maturity to pay off interest-bearing loans is best suited for individuals who have over 10 years of an employed life that allows them to rebuild their PPF accounts.
  • People who are concerned about market fluctuations and require regular income may use the proceeds of their matured PFF accounts to invest it in debt mutual funds (that have less volatility) or tax free bonds. It may however be noted that the after-tax returns on the above mentioned instruments often do not match the returns offered by PPF in each period.

Investors can go for extension of their PPF accounts after maturity if they desire a diversified investment portfolio, want a good tax-free sum as regular income, and safety of their invested money. Contrarily, they can invest the matured PFF account money in equities or other high returns offering assets, or pay off home loans, etc and save on yearly costs. How one uses the PPF money is dependent on the priorities and goals of an investor and the state of his/her financial status when making such a decision.

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