Public Provident Fund (PPF) - Plan Your

Retirement and Save Tax

May 8, 2008 by Raag Vamdatt 137 Comments

This article illustrates the Ieatures oI Public Provident Fund (PPF), and explains how it can be
used Ior long term wealth creation.

Public Provident Fund (PPF) is a great instrument Ior risk-averse investors. It is also a very
good instrument Ior long term wealth creation mainly Ior goals that require relatively saIe
investments. For example, PPF can be a great avenue Ior investing to achieve a goal like
'building retirement corpus. Here`s why.
434,/ Download the spreadsheet that illustrates the PPF returns Ior Rs. 5000 deposited Ior
15 years. You can change the investment amount and rate oI returns to Iind a result oI your own!
(Want to know about PF and VPF? Please read 'Provident Fund (PF) and Voluntary
Provident Fund (VPF)'.)

Features and Benefits of Public Provident Fund (PPF)
Long Term Investment
A PPF account is opened Ior an initial period oI 15 years. That is, you make a commitment oI 15
years upIront and as I always say, this means that you can reap the beneIits oI compounding.
(For more on this, please read 'Start saving early and gain from Compounding - Early bird
gets the worm)This also means that you would not touch these Iunds Ior ad-hoc needs which
makes PPF all the more suitable Ior goals like retirement planning. (Although, early withdrawals
,70possible more about it later)
Please note that the maturity date oI the PPF account depends on the Iinancial year, and not on
the date oI its opening. Thus, iI you have opened the account on 27th August 2007, it would
mature on 1st April, 2023 (and not on 27th August, 2022).
bsolute Safety
PPF is a Government scheme it is backed by the Government oI India. Thus, it is among the
saIest instruments you can invest in India. This guarantees the saIety oI your principal and the
interest earned on it. Again, this makes it suitable Ior long term goals where saIety is very
important.
ultiple Income Tax Benefits
This is a very big sweetener Ior PPF PPF provides not one, but two tax beneIits!
One, the investment made in PPF is deductible Irom your income under Section 80C oI the
Income Tax Act. This means that your entire investment in PPF can be tax Iree, subject to the
provisions oI Sec 80C. (For a detailed explanation oI Section 80C and the income tax beneIits
that it provides, please read 'Saving Income Tax - Understanding Section 80C Deductions)
And two, the interest earned in a PPF account is tax Iree! This means that when your PPF
account matures, and you withdraw your money, you pay absolutely no income tax on it! Isn`t it
Iantastic? This compares quite Iavourably with other instruments like National Savings
CertiIicate (NSC), where the interest is Iully taxable.
(Please note that there are talks going on to introduce tax on the interest earned on an EET
Exempt Exempt Taxed basis. But these talks are at preliminary stages, and there is very little
possibility oI this being implemented in the Ioreseeable Iuture)
Great Interest Rate
Unlike NSCs, the interest rate Ior PPF is not Iixed. It can be changed every year by the
government.
Having said that, it should be noted that the government doesn`t change the interest rate on PPF
drastically since it is held by a very large number oI people. ThereIore, this interest rate is quite
stable.
The current rate oI interest on PPF is 8 per annum. And remember, this interest is tax Iree. II
you are in the highest tax bracket oI 30, this is equivalent to receiving 11.43 interest on a
bank Iixed deposit (FD). Now that`s great, isn`t it?
Example: A deposit oI Rs. 5000 per year Ior 15 years (totaling Rs. 75,000 over the 15 years)
grows into a handsome, risk-Iree Rs. 1,46,621 iI the rate oI return remains 8 per annum.
434,/ Download the spreadsheet that illustrates the PPF returns Ior Rs. 5000 deposited Ior
15 years. You can change the investment amount and rate oI returns to Iind a result oI your own!
Low inimum Investment
The minimum investment in PPF is Rs. 500 per year. This low amount ensures that even people
Ialling in low income groups can save Ior their retirement using a government backed, saIe
investment avenue.
The maximum investment allowed in PPF is Rs. 70,000 per year.
It is not necessary to deposit the amount in one go multiple deposits can be made in a year.
Regular Investments
This is a side eIIect oI the way PPF operates. Since PPF is not a one time lump-sum investment,
you have to invest in it every year, year aIter year, at least Ior 15 years. This brings in discipline,
which many oI us lack when it comes to investments!
Facility of Withdrawals
Yes, PPF is meant Ior long term investments. But there might be times when you need Iunds Ior
some emergency.To take care oI such situations, PPF does allow withdrawals. One withdrawal,
once a year, is allowed Irom 7th year onwards. You can withdraw an amount not exceeding the
lower oI:
a. 50 oI the balance at the end oI the 4th immediately preceding year
b. 50 oI the balance at the end oI the immediately preceding year
(Note: II the PPF account is extended beyond the initial 15 years (in blocks oI 5 years as
explained later), the amount allowed to be withdrawn is 60 oI your balance at the beginning oI
the extended period)
Example: II the account is opened in 1999-2000, and Iirst withdrawal can be made during 2005-
2006. The amount oI withdrawal will be the lower oI:
a. 50 oI the balance as on March 31, 2002
b. 50 oI the balance as on March 31, 2005
Please note that this withdrawal Iacility should be used judiciously. PPF is mean t Ior long term
savings, and utmost care should be exercised while withdrawing money Irom it. You should
withdraw only Ior emergencies, like a medical emergency. Funds should not be withdrawn Ior
Iunding purposes, like Ior buying a car or a house.
Facility of Loan
In case oI emergency situations beIore the 7th year, you can take loans Irom your PPF account.
You can take loans between 3rd and 6th year oI opening the PPF account.
The maximum loan amount available will be equal to 25 oI the balance at the end oI the 2nd
immediately preceding year.
Example: In our example, iI loan is sought in 2004-2005, the maximum amount oI loan
available would be 25 oI the balance as on March 31, 2003.
The rate oI interest on the loan is usually 2 over and above the rate oI interest you receive in
the PPF account. This loan has to be repaid within a period oI 24 months.
Once you repay a loan, another loan can be taken as long as you are within the 3rd and the 6th
year oI opening the account.
Extension Possible
II you do not need the Iunds at the time oI maturity (aIter 15 years), or can not Iind a better
investment avenue Ior these Iunds, you can opt to continue the PPF account.
You can extend the PPF account Ior 5 years at a time, and you can have as many extensions as
you want.
Nomination Facility vailable
You can speciIy a nominee Ior your PPF account. The nominee would get the trusteeship oI this
account in case your death occurs beIore the closure oI the PPF account.
(To know more about nomination, please read 'When you aren`t around - Succession
Planning - Will and Nomination)
Others
Default: In case oI a deIault, when even Rs. 500 is not paid in a year, the PPF account can be
regularized by depositing Rs. 500 per year oI non-payment, along with a penalty oI Rs 100 per
year oI non-payment.
A person can have only one PPF account at any time.
A PPF account can not be opened in joint names. It has to be in one person`s name only.
Deposits in excess oI Rs. 70,000 are returned without any interest

Great Supplement to Provident Fund (PF)
The beneIits oI Public Provident Fund are many-Iold. Many oI these beneIits are available
through Provident Fund (PF) as well. Still, iI you Ieel the PF deductions alone are not enough,
you can open a PPF account.

PPF - Excellent tool for Business People
II you are not salaried, there is no provident Iund being created Ior you! For non-salaried people,
PPF is an ideal vehicle to saIely build the corpus Ior retirement.
Another Iactor, especially important Ior business people, is that PPF cannot be attached under
any order or decree of court. This means that even iI all your assets are liquidated to IulIill any
oI your liabilities, the entire amount in a PPF account remains with you. This is an added level oI
saIety, and can prove extremely useIul to business people.

Where can a Public Provident Fund (PPF) account be
opened?
A PPF account can be opened at:
O Any branch oI State Bank oI India and its subsidiaries
O At the head post oIIices or sub post oIIices
O At branches oI the nationalized banks engaged in the collection oI direct taxes
On opening oI a PPF account, a passbook is issued. This passbook is used to record all the
transactions Ior that PPF account deposits, interest earned, withdrawals and loans.

Online PPF ccounts
Like investment in shares and mutual Iunds, wouldn`t it be nice iI we could invest in PPF online?
Online PPF account would add so much convenience to this excellent savings vehicle!
The good news is: Some banks do oIIer online PPF accounts. With these banks, investors can
open and maintain their PPF accounts online.
ICICI Bank was the Iirst private sector bank to oIIer this Iacility to its customers. ICICI
customers can access their internet banking accounts, and transIer money directly Irom their
savings accounts into their PPF account.