What is Public Provident Fund?
Public Provident Fund (PPF) is a scheme of the Central Government, framed under the PPF Act of 1968. PPF is a government backed, long term small savings scheme, which was initially started by the Government because it wanted to provide retirement security to self-employed individuals and workers in the unorganized sector.
The investor can open the PPF account that has a minimum maturity period of 15 years with an option to extend for 5 years on maturity. A customer can extend the tenure of the PPF account for a period of 5 years beyond the maturity period by submitting Form H within one year from the date of maturity. The investor earns a rate of interest on the amount deposited in the account subject to terms and conditions. A maximum of Rs 150,000 is allowed to be deposited in the PPF account in a single year which also provides for income tax exemption under the sec.80C along with the interest income on the deposit also being tax free in the hands of the investor.
The amount is compounded as the interest income is added back to the principal after every year. The excess amount invested in PF over and above Rs 150,000 will neither earn any interest nor will be eligible for rebate under the Income Tax Act. The amount can be deposited in lump sum or in a maximum of 12 instalments per year.
It can simply be compared to a fixed deposit scheme with all the tax benefits with a maturity period of 15 years.
Employee Provident Fund
The Employees’ Provident Fund (EPF) is one of the most popular investment scheme for the salaried persons in India. The Employees’ Provident Fund Organisation, a statutory body under the Ministry of Labour and Employment Government of India, administers social security schemes framed under the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 namely Provident Fund, Pension and Insurance to industrial employees. The PF account benefits are extended to all the establishments that employ 20 or more persons.
The EPF is one of the main platforms of savings for all employees working in Government, Public or Private sector Organizations. It came into existence with the promulgation of the Employees’ Provident Funds Ordinance on the 15th November, 1951. It was replaced by the Employees’ Provident Funds Act, 1952. It is now referred as the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 which extends to the whole of Indian except Jammu and Kashmir. The Employees’ Provident Funds Bill was introduced in the Parliament as Bill Number 15 of the year 1952 as a Bill to provide for the institution of provident funds for employees in factories and other establishments.
A provident fund is created with a purpose of providing financial security and stability to employees. A person starts his or her contribution in the PF fund once he joins a company as an employee. The contributions are made on a regular basis. The primary purpose of PF fund is to help employees save a fraction of their salary every month so that he or she can use the same in an event that the employee is temporarily or no longer fit to work or at retirement.
Employers and employees both contribute 12% of wages in contribution accounts. The rate of contribution for certain category of establishments is 10%. These are:-
- Any establishment in which less than 20 employees are employed
- Any sick industrial company and which has been declared as such by the Board for Industrial and Financial Reconstruction
- Any establishment which has at the end of any financial year has accumulated losses equal to or exceeding its entire net worth, and
- Any establishment in following industries: – Jute, Beedi, Brick, Coir and Guar gum Factories.
- The contributions are statutorily payable up to a prescribed wage ceiling, which is Rs.6500/- as on date.
Individuals who are residents of India are eligible to open their account under the Public Provident Fund scheme. A PPF account may be opened under the name of a minor by his/her legal guardian. However, each person is eligible for only one account under his/her name.
Non-resident Indians (NRIs) are not eligible to open an account under the Public Provident Fund Scheme. This is an act regulation by Indian Govt. However a resident who becomes an NRI during the 5 years’ tenure prescribed under Public Provident Fund Scheme, may continue to subscribe to the fund until its maturity on a non-repatriation basis.
Investment and returns
A minimum deposit of Rs.100 is required to open the PPF account and a minimum of Rs.500 is required to be deposited to maintain the PPF account and a maximum deposit of Rs.150,000 (w.e.f August 2014) can be made in a PPF account in any given financial year. The subscriber should not deposit more than Rs.150,000 per annum as the excess amount will neither earn any interest nor will be eligible for rebate under Income Tax Act. The amount can be deposited in lump sum or in a maximum of 12 instalments per year. A penalty of Rs.50 is levied per year of default, if the customer doesn’t deposit the minimum deposit amount of Rs.500 on the completion of the financial year.
The Government of India decides the rate of interest for PPF account. The current interest rate effective from 1 October 2016 is 8.00% Per Annum (compounded annually). Interest is paid on 31st March every year. Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month.
The interest rate offered on the PPF is not fixed, but linked to the market. It is linked to the Ten-Year Government Bond Yield. This does not mean that the rate will change on a day-to-day basis. It is announced every year in April, based on the average bond yield in the previous year.
Loan facility is available from the 3rd financial year up to 5th financial year from the date of opening the account. From December 2011 the rate of interest charged on loan taken by the subscriber of a PPF account is 2% more than the prevailing interest on PPF.
Up to a maximum of 25% of the balance at the end of the 2nd immediately preceding year would be allowed as loan. Such withdrawals are to be repaid within 36 months.
A second loan could be availed as long the investor is within the 3rd and before the 6th year, and only if the first one is fully repaid. Also note that once the investor becomes eligible for withdrawals, no loans would be permitted. Inactive accounts or discontinued accounts are not eligible for loan.
Withdrawals from PPF account
There is a lock-in period of 15 years and the money can be withdrawn in whole after its maturity period. Pre-mature withdrawals can be made from the end of the sixth financial year from when the investment commenced. The maximum amount that can be withdrawn per-maturely is equal to 50% of the amount that stood in the account at the end of 4th year preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.
After 15 years of maturity, full PPF amount can be withdrawn and all is tax free, including the interest amount as well.
Nomination facility is available in the name of one or more persons. The shares of nominees may also be defined by the subscriber.
Transfer of Account
The account can be transferred to other branches/ other banks or Post Offices and vice versa upon request by the subscriber. The service is free of charges.
Step 1 – Approach the bank or post office branch where the PPF account is held and ask for the form for making the transfer. The bank or post office will provide with a form which is to be filled.
Step 2 – The existing bank will then forward the certified copy of the account, the account opening application, nomination form and specimen signature. It will also forward the cheque/dd for the outstanding amount in the PPF account to new bank at the branch specified by the customer.
Step 3 – Once the bank receives these documents, the bank will inform the customer to submit a new PPF account opening form along with the old PPF passbook. The investor can also provide nominations for this new account and is required to submit the KYC documents.
PPF Tax Concessions
Annual contributions qualify for tax rebate under Section 80C of income tax. Contributions to PPF accounts of the spouse and children are also eligible for tax deduction. Balance in PPF account is not subject to attachment under any order or decree of court. But, Income Tax authorities can attach the account for recovering tax dues. The highest amount that can be deposited is Rs.150,000. So contribution is exempted under 80C, Interest earned is tax exempted and withdrawal is also tax exempted. Interest earned is fully exempted from tax without any limits. Annual contributions qualify for tax rebate under section 80c of income tax. Contributions to PPF accounts of the spouse and children are also eligible. The scheme is fully guaranteed by the Central Government.