PPF – the complete tax free investment solution

For over half a century now, investment in PPF under the Public Provident Fund  Scheme, 1968 has been a favourite savings avenue for several investors and is still standing tall.

It is one of the most popular small savings schemes, and why would it not be. After all, the principal and the interest earned have a sovereign guarantee and the returns are completely tax-free.

It offers a return of 7.80 per cent per annum (of course subject to change every three months). For a tax assessee in the highest tax bracket at 30.90 per cent, it translates to nearly 11.28 per cent taxable return. Surely, we can’t think of many taxable investments which provide such high pre-tax returns.

In terms of income tax implications, they also qualify for E-E-E (exempt, exempt, exempt) tax category, which means you are not liable to pay tax at all three levels – investment, earning and withdrawal.

I don’t need to teach you that you can invest a maximum of INR 1.50 lakhs in a financial year while the minimum deposit required to keep the account alive is INR 500 and the investments qualify for deduction under Section 80C of the Income Tax Act 1961.

Investments in this safe long-term savings instrument which provides tax incentives too, can be made in lump-sum or in 12 instalments may also not be news to you.

But there are some 12 minor aspects of a PPF account you may not be aware of, and here are they.

1) Partial withdrawal from PPF account is allowed every year from the 7th financial year from the year of opening account, subject to a maximum of 50 per cent of the balance at the end of the fourth year immediately preceding the year of withdrawal or the amount at the end of the preceding year, whichever is lower.

2) A PPF account can be continued after maturity, with or without making further contributions.

3) The original maturity period of a PPF account is 15 years and it can be extended indefinitely in blocks of five years.

4) Partial withdrawals are allowed from PPF accounts even during the extended period.

5) In case you chose the with-contribution mode during the extended period, you can withdraw up to 60 per cent of the amount held in the account at the beginning of the extended period.

6) If you have chosen the without-contribution mode during the extended period, any amount can be withdrawn.

7) The interest every month is calculated on the minimum balance available in the account from 5th of the month to the last date of the month. So if you deposit your money after the fifth day of the month, you stand to lose out on substantial interest income for that particular month.

8) Partial withdrawals from PPF account are also tax-free. Section 10(11) of the Income Tax Act, 1961 exempts from tax all payments from PPF and partial withdrawals or premature closure are not exceptions.

9) You can avail loan on your PPF account from the the 3rd financial year of the opening of the account till the 6th financial year subject to a maximum of 25 per cent of the balance at the end of the second year preceding the year in which the loan is applied for.

10) A PPF account can be opened in a designated post office or a bank branch with some banks also allowing you to open it online.

11) You are permitted to transfer a PPF account between different Banks and also from a post office to a bank or vice versa.

12) A person of any age, including minors can open a PPF account. Even those who are employees having an EPF account can open a PPF account. 

PPF may not be for those looking for long-term high inflation-adjusted target amounts, for which it is better to take equity exposure, preferably through equity mutual funds, including ELSS tax saving funds.

But for those investors who do not want volatility in returns akin to equity asset class, PPF is the complete tax free investment solution.


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