Know About Public Provident Fund Scheme

                      Public Provident Fund Scheme - 

                            PPF Benefits and Rules-

By Sri Rajesh Goyal 

(source: allbankingsolutions.com)

What is PPF  or Public Provident Fund Scheme ?

The full form of PPF is Public Provident Fund Scheme.  It is a scheme of the Central Government, framed under the PPF Act of 1968.   Thus we can say PPF  is a government backed, long term small savings scheme, which was initially started by the Government to provide retirement security to self employed individuals and workers in the unorganized sector.   However, at present it is considered as the best tax saving scheme across all sections of the people who needs to invest to save some tax.  

Who Can Open a PPF Account or Who are eligible for Public Provident Fund Scheme Accounts ? Who CAN NOT open PPF account ?:-

• Individuals who are residents of India can open an account under the scheme.
• Only one PPF account can be maintained by an Individual, except an account that is opened on behalf of a minor.   Thus, PPF account can also be opened by either parent under the name of a minor.  However, each person is eligible for only one account under his/her name.  Mother and Father both cannot open Public Provident Fund (PPF) accounts on behalf of the same minor. Thus, in case a couple has two children, they can maximum open four accounts i.e. two in their own accounts and two in the name of their children under guardianship of either of the parent.
• Non-resident Indians (NRIs) are NOT  eligible to open an account.  However a resident who becomes an NRI during the tenure prescribed under Public Provident Fund Scheme, may continue to subscribe to the fund until its maturity on a non-repatriation basis. (Funds can be transferred via CASH or NRO Account. Funds can be transferred via Internet banking).  However, such an account will not be eligible for extension of five years at the time of maturity.
• Since 13th May, 2005, Hindu Undivided Family can NOT open an account under the scheme.   However, accounts opened prior to that date may continue subscription to their account till maturity.   They also can not extend the account any further.

Where Can One open a PPF Account ? : - 

The PPF account can be opened at either of the following :

(a) Branches of State Bank of India and it subsidiaries;

(b) Select branches of designated nationalised banks;

(c) Select Post Offices across India;

What Documents are Usually Asked by the Bank / Post Office for Opening Account :

Following documents are usually required for opening a PPF account :-

• Account Opening Form (Form  A)
• Passport size photograph
• Copy of PAN card
• Residence proof – Passport /  Electricity Bill

Public Provident Fund Rules / PPF Guidelines / Special Features of PPF Account :

• It is a 15 years scheme.  Thus, as per normal rules,  Public Provident Fund (PPF) account gets matured after the completion of 15 years from the end of the year in which the account was opened.   However, on maturity this period can be extended any number of times for a block of 5 years each time.  This can be done by  submitting Form H within one year from the date of maturity.   (For details see below)  
• No premature closure of the account  is allowed.Only in the case of the death of a customer, their nominee /legal heir can close the account by submitting the required documents as guided by the Ministry of Finance.
• At any point in your life, you are allowed to have only one PPF account in your name. (If at any time it is found  that you have more than one account in your own name, the second account will be immediately deactivated, and you will be eligible to get only principal amount).
• You can open  have an account in the name of a minor child of whom you are the parent / guardian.  However that will be the child’s account, you will simply be the guardian. You can never have a joint account.
• You are not allowed to an account for a minor.  If you open an account with a minor (say jointly) , it is considered to be your PPF account.
• A minimum yearly deposit of Rs. 500 is required to open and maintain a PPF account
• A maximum deposit of Rs.100000/ can be made in a PPF account in any given financial year.  As per PPF rules, you are just not allowed to invest more than Rs 1 lac in your own PPF account or any other PPF account where you are guardian.   Thus, if you have two children and you have  also opened PPF account in their names, you should deposit maximum of Rs 1 lac in all three accounts togeher.  Although technically, it is possible that one can deposit Rs 1 lac in each of such accounts as no one stops you from doing it.  However, as an abundant caution, you should be aware that if in future it comes to the notice that you have been avoiding the rules, you might not get any interest on the excess amount.
• The investments can be made in multiples of Rs. 500, either as a whole sum, or in installments (maximum instalments can be 12 in a year, though more than one deposit can be made in a month).
• The credit to the PPF account is made on the date of clearance of the cheque, not on the date of its presentation.
• The entire balance can be withdrawn on maturity. Interest received is tax free
• Deposit to PPF is tax deductible for individual assessees in India u/s 80C of Income Tax Act, 1961.

 What are the PPF Account Benefits or What Kind of Tax Rebates / Concessions are available on deposits in PPF accounts ?

• Deposits upto Rs 1,00,000 p.a. into your PPF account are deductible under Section 80c of Income Tax Act.   Contributions to PPF accounts of even the  spouse and / or children are also eligible for tax deduction.
• Even the interest earned in the PPF accounts i.e. on the full balance in your PPF account is completely exempt from tax.  In other words, your returns on investment in PPF are tax free.  
• Above all, the balance in  PPF account cannot be attached to any claim in case of debt or  liability.   Thus the money is yours for life or even after death it is available for your family.   

What is the biggest draw back of the PPF Scheme ? :-

It is a long term investment, and thus people who are ready to block the funds for longer tenure should opt for this scheme.  Although part withdrawals and loans are allowed, yet these are available only as a small percentage of the total balance.   Thus, PPF scheme is considered as illiquid.

Moreover, the rate of interest allowed on PPF account has been less than the inflation rate for number of years recently, and thus, some consider these to be negative returns.

[Inspite of these drawbacks, PPF is considered as the top scheme for the investors who wish to save tax through Section 80C or earn tax free interest]

What is the rate of interest on PPF Accounts / What is the current interest for PPF Scheme ?  : -

The rate of interest payable on PPF balances is fixed on yearly basis.   The rate of interest has fluctuated a lot during last decade, and is likely to remain stable or even go down marginally in the years to come.  The details of the rate of interest paid during last few years is given below:-

Period	Interest Rate (p.a.)
01 Dec 2011 - 31 March 2012	8.60%
01 April 2012 - 31st March 2013	8.80%
01 April 2013 - 31st March 2014	8.70%
01 April 2014 - 31st March 2015	8.70%

Thus PPF current interest rate is 8.70% (upto March 2015)

You should remember that  interest on PPF is calculated on the minimum balance in your account between the 5th and the last day of every month,   Therefore, in case you wish to deposit large amount at any time of the year,  ensure that you invest (i.e. your PPF account is credited with the investment amount) on or before the 5th of that  month, so that you are able to earn interest for the entire month.

Eligibility   for Loan from PPF Account ?  :-

Customers can avail of the loan facility between third financial year to sixth financial year ie. from third financial year upto end of fifth financial year.  The subscribers of PPF account are allowed to take a loan from the fund in case of need.  The rules of PPF provide “Notwithstanding the provisions of paragraph 9, any time after the expiry of one year from the end of  the year in which the initial subscription was made but before expiry of five years from the end of the year in which the initial subscription was made, a subscriber may, he so desires, apply in Form D or as near thereto as possible, together with his pass book to the Accounts Office for obtaining loan…”  

Let us understand this by an example.    Let us say, Ram opened his  PPF account in September,  2011.  The end of the financial year when the initial subscription was made is March 31^st, 2012. The expiry of one year from the end of that financial year makes it 31^st March, 2013.    Therefore, from this date onwards, i.e. from 31^stMarch 2013, until ‘before expiry of 5 years from the end of the year in which the initial subscription was made’ i.e. 5 years from 31^st March, 2012,  i.e. 31^st March, 2017 only Ram will be entitled to apply for a loan against your PPF balance.

Similarly, the rules provide as to how much loan can one take from his PPF account.   The rules provide “… A subscriber may, he so desires, apply in Form D or as near thereto as possible, together with his pass book to the Accounts Office for obtaining loan consisting of a sum of whole rupees not exceeding twenty five percent of amount that stood to his credit to at the ends of the second year immediately preceding the year in which the loan is applied for.”  Thus,the loan amount will be limited to 25% of the balance outstanding to the subscriber's credit at the end of the second year immediately preceding the financial year in which the loan is requested.  For example, a subscriber requesting a loan in April 2011 will be eligible for 25% of the amount (including interest that stood to his credit as on 31st March, 2010.

Repayment of Loan Amount : The loan repayment is required to be made in one lump sum or in two or more monthly installments within 36 month period.   After the principal amount of the loan is fully repaid, the subscriber shall pay the interest amount in not more than two monthly installments.  Interet is calculated at 2% above on the principal amount for the period commencing from the first day of the month following the month in which the loan is availed upto the last day of the month in which the last installment of the loan is repaid.

Withdrawals from Public Provident Fund Accounts?  What is the schedule for such withdrawals?

Yes, one can make one withdrawal per year starting from your seventh year.  The first withdrawal can be done after the expiry of 5 full financial years from the end of the year in which your initial subscription was made.   The amount of withdrawal will be limited to 50% of the balance at credit at the end of the fourth year immediately preceding the year in which the amount is to be withdrawn, or the balance at the end of the preceding year, whichever is lower, Thereafter, you can make one withdrawal per year. The withdrawal amounts are not repayable.

For example, an account opened in January 2010 will be eligible for partial withdrawal from 1st April, 2015.   For a partial withdrawal requested in April 2015, the amount of withdrawal will be limited to 50% of the lower of the balances standing to his / her credit as on 31st March, 2012 or as on 31st March, 2015.

What will happen if I forgot to deposit the minimum subscription in one particular financial year :

In case you fail to deposit the minimum amount of Rs 500/ in a financial year, your PPF account is marked as de-activated account.  The silverlining is that it can be again activated by paying a small penalty.   Thus to re-active your account, you need to pay a fine of Rs.50 for each year that you have not made any subscription, and also make a minimum subscription of Rs. 500 for each year you have missed.   Then your account will be reactivated and you will re-start earning interest.    The account will only be closed after maturity and will continue to earn interest till it is closed. The facility of loan or withdrawal will not be allowed from such account.   However, the account can be regularized by remitting a penalty of Rs. 50 per financial year and this  should be credited to Government of India / RBI.

A subscriber of de-activated account will not be entitlted to obtain a loan or make a partial withdrawal unless the account is revived.   Moreover, such a subscriber can not open another PPF account in addition to the de-activated account, at any other office.

What are the Rules for Non Resident Indians for Opening / Continuing PPF account opened before they became NRI :

Let us be clear that NRIs are not eligible to open fresh PPF account.   Thus, if you are an NRI and wish to open a new PPF account, then you are NOT  eligible to open the same.   However, those NRIs who already had a PPF account, when they were resident in India, but became NRI during the tenure of the PPF account, then you are eligible to continue investing in the account until it matures, but on a non repatriable basis. This means NRIs are allowed to continue their existing PPF accounts till maturity but such funds on maturity will not be eligible to be repatriated abroad and needs to be used in India only.

What are the options available to the subscriber on maturity of the PPF account i.e. at the end of 15 years period from the end of the year of subscription :

A subscriber has three options at the maturity of the PPF account :-

(a) He / she  can withdraw the maturity amount, or (b) he / she  can extend the  account by a 5 year block, as many times as he / she  wants and make fresh contributions every year , or (c)  he / she  can extend the account without making any further contributions, and continue to earn interest on it every year.

Some interesting features of these are :-

• In case a person decide to withdraw your money, your maturity value is exempt from tax. 
• In case the person decides to extend his / her account and continue making fresh contributions, he can extend it for a block of 5 years at a time, as many times as he wish.   He can also make withdrawals from the account, upto 60% of the account balance that was there at the beginning of the extended period.  The period can be extended by submitting Form H before one year passes from the maturity date.

• In case the person chooses to extend the account without making any fresh contributions, you can do this too.    In this case, amount can be withdrawn any restrictions, but only once every year.  The left over balance will continue to earn interest till it is withdrawn.

PPF rules provide as under for above eventualities :

“Subject to the provisions of sub-paragraph (3) a subscriber may, on the expiry of 15 years from the end of the year in which the initial subscription was made but before then expiry of one year thereafter, may exercise an option with the Accounts Office in Form H, or as near thereto as possible, that he would continue to subscribe for a further block period of 5 years according to the limits of subscription specified in paragraph 3.”

And also regarding withdrawals during these extension periods, here is the rule:

“In the event of a subscriber opting to subscribe for the aforesaid block period he shall be eligible to  make partial withdrawals not exceeding one every year by applying to the Accounts Office in Form C, or  as near thereto as possible, subject to the condition that the total of the withdrawals, during the 5 year  block period, shall not exceed 60 percent of the balance at his credit at the commencement of the said period.”

What are the rules for transfer of PPF account from one bank to another bank / post office :   In terms of  PPF scheme  subscribers can transfer their PPF account from one authorised bank or Post office to another.

• The subscriber should  approaches the bank / Post office where  he /she has  current PPF account  and makes an application for transfer of PPF account to  the Bank Branch / Post Office where he intends to transfer the same;.
• The existing bank/Post office will process the application and send the original documents such as a certified copy of the account, the account opening application, nomination form, specimen signature etc. to Bank branch / Post office where the account needs to be transferred,  along with a cheque/DD for the outstanding balance in the PPF account.

What are the rules for nomination in PPF account ?:

PPF Scheme allows nomination of one or more persons to receive the amount standing to the subscriber's credit in case of death.   However, no nomination is possible in case of minor account.   Subscriber is even allowed to change the previous nomination (s) by applying fresh on nomination form F.