The Public Provident Fund scheme is one of the most trusted long-term investment options in India. It was introduced by the Government to encourage savings and investment among individuals while offering tax benefits. Initially introduced through notification GSR 1136 dated 15-06-1968, the scheme has undergone several amendments. The most recent update was notified through G.S.R. 915(E) dated 12-12-2019.
This scheme is backed by the Government of India and hence offers a high level of security and attractive interest rates. The interest earned and the returns are not taxable under Indian Income Tax laws, making it a preferred option for conservative investors.
Key Features of the Public Provident Fund Scheme
The Public Provident Fund account can be opened with a minimum deposit of ₹500. The maximum amount that can be deposited in a financial year is ₹1,50,000. Deposits can be made in a lump sum or instalments. The account matures after the completion of fifteen full financial years from the end of the financial year in which the account was opened.
The scheme also provides a loan facility between the third and sixth year and allows for partial withdrawals starting from the seventh financial year. After maturity, the account holder can extend the account in blocks of five years with or without making additional deposits.
Another major advantage is that the balance in the PPF account cannot be attached by any court order. This feature adds a layer of protection to the investment. Deposits qualify for deduction under Section 80C of the Income Tax Act, and the interest earned is also tax-exempt under Section 10.
Eligibility for Opening a Public Provident Fund Account
A PPF account can be opened by any Indian resident individual. The account can be opened at any nationalised bank, selected private banks, or a post office. To open an account, the applicant must submit Form 1 along with necessary identification and address proof documents, and the initial deposit amount.
The account can also be opened on behalf of a minor or a person of unsound mind, provided the individual opening the account is the legal or natural guardian of such person. However, only one PPF account is allowed per individual. This restriction also applies to accounts opened for minors or persons of unsound mind. Joint PPF accounts are not permitted under the scheme.
Consequences of Not Depositing the Minimum Amount
The minimum annual deposit required to keep the account active is ₹500. If the account holder fails to make the minimum deposit in any financial year, the account is considered discontinued. A discontinued account does not allow for loans or partial withdrawals.
However, the account can still be revived at any time during its tenure by paying a penalty of ₹50 for each defaulted year and the minimum deposit amount for each of those years. Notably, any penalty paid is not counted as part of the deposit amount to calculate interest or tax deduction.
Even if the account is not revived, it will continue to earn interest at the applicable rate until maturity. But the account holder cannot open a new PPF account until the existing discontinued account is closed post-maturity.
Deposit Structure and Limits
PPF deposits can be made in a lump sum or instalments. There is no limit on the number of instalments in a financial year, but the total amount deposited cannot exceed ₹1,50,000. This limit includes the deposits made in an individual’s account and any account opened on behalf of a minor or a person of unsound mind.
The account must be opened with an initial deposit of at least ₹500. All subsequent deposits must be in multiples of ₹50. The account holder must ensure that at least ₹500 is deposited in every financial year to keep the account active.
The government does not pay interest on any amount deposited over and above the maximum limit of ₹1,50,000 in a financial year. Therefore, investors must keep track of their contributions to avoid overfunding.
Interest Rate on Public Provident Fund
The interest rate on PPF is declared by the Ministry of Finance at the end of every quarter. Interest is calculated on the minimum balance in the account between the fifth and last day of each calendar month. The interest is credited to the account at the end of the financial year.
Over the years, the interest rate has seen various changes. From April 1986 to January 2000, the interest rate was as high as 12 per cent. It has gradually decreased over the years in line with overall market trends and economic policy. As of April 2020, the interest rate is 7 per cent.
Historical data shows the interest rates have ranged from 12 per cent in the late 1980s to 7.1 per cent in recent years. Despite fluctuations, the PPF has continued to offer competitive returns compared to other risk-free instruments.
Rules for Withdrawal from PPF Account
Withdrawal from the PPF account is permitted only after the completion of five financial years from the end of the year in which the account was opened. If the account is opened on behalf of a minor or a person of unsound mind, withdrawal is allowed for their benefit, provided they are alive at the time of withdrawal.
The amount that can be withdrawn is restricted to 50 per cent of the balance at the end of the fourth year preceding the withdrawal year or the balance at the end of the immediately preceding year, whichever is lower. This condition applies even during the extended period after maturity if deposits are made.
During the extended block of five years, the account holder can withdraw up to 60 per cent of the balance at the beginning of the block. This can be done in a single withdrawal or annual instalments. If the account is extended without additional deposits, no withdrawals are allowed during the extended period.
To make a withdrawal, the account holder must submit Form 2. If the withdrawal is for a minor or r person of unsound mind, the guardian must submit a certificate affirming that the beneficiary is alive and the funds will be used for their benefit.
Conditions Applicable to Withdrawals
Withdrawal is allowed only once per year. If any loan is outstanding against the account, the loan must be repaid in full, including interest,t, before applying for a withdrawal. Withdrawals are not permitted from discontinued accounts.
If the account has been extended without making further deposits, then the facility of withdrawal during the extended period is not available. However, if the account is extended with deposits, withdrawal up to 60 per cent of the balance at the start of the extended block is permitted over the block period.
In summary, PPF withdrawal rules are structured to discourage frequent or premature withdrawals, thereby ensuring long-term savings discipline among investors.
Premature Closure of PPF Account
The PPF account can be closed prematurely only after the completion of five financial years from the end of the year in which the account was opened. This is allowed in specific cases,, including serious illness of the account holder or their immediate family members, higher education of the account holder or their dependent children, or a change in residency status.
In all cases, relevant documents must be submitted as proof. For illness, medical reports and certification from a treating physician are required. For higher education, fee bills and admission proof from a recognised institution must be provided. For a change in residency, a copy of the passport and visa or income tax return indicating the change must be submitted.
Premature closure comes with a financial penalty. The interest credited to the account from the date of opening will be recalculated at a rate one per cent lower than the actual interest credited. The application for premature closure must be made in Form 5.
The provision for premature closure balances flexibility for investors to encourage long-term savings.
Extension of PPF Account After Maturity
Once the initial fifteen-year maturity period of a PPF account ends, the account holder has two choices. The first is to withdraw the entire amount and close the account. The second is to extend the account in blocks of five yea,r, either with or without further deposits. The decision to extend must be communicated to the account office through Form 4 within one year from the date of maturity.
Extension Without Additional Deposits
If the account holder opts to extend the PPF account without making additional deposits, the account will continue to earn interest at the prevailing rate. However, once the decision to continue without deposits is exercised, it cannot be changed later to add deposits again. The account holder can make withdrawals from the balance, but only once per financial year.
If the account holder fails to make any deposit in the first financial year after maturity and also fails to communicate their decision to continue with contributions, they will automatically be considered as continuing the account without deposits. In this case, the balance will continue to earn interest, but no further deposits will be accepted. Any deposit made under such circumstances will be considered irregular and refunded without interest.
Extension With Additional Deposits
The account can be extended in blocks of five years with the option of making fresh contributions. The decision to extend with contributions must be exercised before the end of one year from the date of maturity. The investor must submit Form 4 to the bank or post office where the account is held.
Each five-year extension is treated as a new block period for withdrawal limits and interest calculation. All normal rules regarding deposits, withdrawals, and tax benefits apply during the extended block as well. At the end of a five-year extension period, the account holder can opt for another five-year extension by submitting a fresh application.
The maximum limit of ₹1,50,000 per year for deposits continues to apply during the extension period. The account holder can make withdrawals during the extension period, but the total amount withdrawn during a block period cannot exceed 60 per cent of the balance at the beginning of that block. Withdrawals can be made in instalments or a lump sum, but only one withdrawal is allowed per year.
Withdrawal Rules During Extended Period
During the extended block with contributions, the account holder can make partial withdrawals, provided the total withdrawal does not exceed 60 per centt of the balance at the start of the block. For example, if the account holder had ₹10,00,000 at the start of the extension, withdrawals up to ₹6,00,000 are allowed over the five years.
In case the account is extended without deposits, only one withdrawal is allowed each financial year. The amount that can be withdrawn is not limited to 60 per cent in such cases, but the withdrawal must not exceed the balance available. However, no new deposits can be made once the account is continued without contributions.
Application for Extension
The application for extension must be made before the end of one year from the date of maturity. If the application is not submitted in time and deposits are made, such deposits will be treated as irregular and refunded without interest. The account will then be treated as continued without deposits.
The extension decision, once made, cannot be changed. If the account holder opts for extension with deposits and does not make any deposit in the first financial year, then the account is still treated as extended with the intention to deposit and not as an extension without deposits.
Multiple Extensions and Other Conditions
There is no restriction on the number of times an account can be extended in blocks of five years. However, the application for extension must be submitted at the beginning of each new block. The same rules apply to accounts opened on behalf of minors or persons of unsound mind, with the guardian submitting the extension application on their behalf.
All features applicable during the original fifteen-year tenure of the account, including tax benefits, interest calculations, and loan facilities, are also available during the extended period. The interest earned remains tax-free under the Income Tax Act.
Loan Against PPF Account
One of the unique features of the Public Provident Fund is the availability of a loan facility against the balance in the account. This facility is available from the beginning of the third financial year and continues until the end of the sixth financial year from the account opening date.
The loan can be availed by submitting Form 2. If the account was opened for a minor or a person of unsound mind, the guardian can apply for a loan, provided the funds are used for the benefit of the account holder.
Loan Eligibility and Limit
The maximum loan amount that can be availed is 25 per cent of the balance at the end of the second financial year immediately preceding the year in which the loan is applied. For example, if the loan application is made in 2023-24, then 25 per cent of the balance at the end of 2021-22 can be availed as a loan.
This percentage limit is strictly adhered to and provides liquidity support to account holders without disturbing the long-term nature of the investment. The actual loan amount sanctioned may be lower than the maximum eligibility, depending on the discretion of the accounts office.
Interest Rate on Loans
Interest on the loan is charged at 1 per cent per annum of the principal amount borrowed. The interest is payable from the first day of the month in which the loan was taken to the last day of the month in which the final repayment is made. The loan must be repaid within thirty-six months from the first day of the month following the month in which the loan was sanctioned.
If the loan is not repaid within the stipulated thirty-six months, the interest rate increases to 6 per centt per annum. This higher interest rate applies from the date of sanction until the date of final repayment.
Loan Repayment Conditions
The loan can be repaid in a lump sum or monthly instalments. After the full principal amount has been repaid, the interest must be paid in at most two monthly instalments. If the interest is not paid on time, the amount due is debited from the account holder’s balance at the end of the financial year.
In case of the death of the account holder before repayment, the nominee or legal heir must pay the interest due. This amount may be adjusted from the account balance during final settlement.
Conditions for Fresh Loan
A new loan can be granted only if the previous loan has been fully repaid along with the applicable interest. Also, only one loan is allowed in a financial year. If the loan is repaid in less than a year, the account holder cannot apply for another loan in the same financial year.
The ability to take loans under the PPF scheme provides account holders with a short-term financing option without affecting their long-term savings goals and without needing to resort to high-interest loans from other sources.
Protection of PPF Account Balance
One of the most attractive features of the PPF account is the protection it offers against attachment. The balance in the PPF account cannot be attached by any court of law for the recovery of any debt or liability incurred by the account holder. This legal protection makes the PPF an excellent instrument for safeguarding long-term savings.
Even if the account holder defaults on loans, faces bankruptcy, or is involved in legal proceedings, the amount in the PPF account cannot be claimed by creditors. This feature enhances the trust of investors and adds a level of security unmatched by most other financial instruments.
Eligibility of Non-Resident Indians
Under the new PPF scheme rules, the clause that prohibited Non-Resident Indians from investing in PPF accounts has been removed. However, practical restrictions still exist. While the new rules do not expressly forbid NRIs, Form 1, which is required for opening a PPF account, includes a declaration that the applicant is a resident citizen of India.
This creates a contradiction because an NRI cannot legally sign the declaration if they are no longer a resident. As a result, while the scheme no longer explicitly disallows NRIs, the procedural requirement effectively restricts them from opening a new account.
If an individual who holds a PPF account subsequently becomes a non-resident, they are not required to close the account. They must, however, inform the accounts office of the change in their residency status. The account can continue to earn interest, but fresh contributions may not be permitted depending on the institution’s interpretation of the rules.
PPF Withdrawal Rules
Withdrawals from the Public Provident Fund are allowed, but they come with certain conditions. Partial withdrawals are permitted from the start of the seventh financial year after the account is opened. The maximum amount that can be withdrawn is the lower of 50% of the balance at the end of the fourth financial year or the end of the previous financial year, whichever is lower. Only one withdrawal is allowed per financial year. If a loan has been taken from the PPF account, it must be repaid before making a withdrawal. Full withdrawal is allowed only on maturity of the account, i.e., after 15 years. Premature closure of the account is permitted under specific circumstances like critical illness or higher education, but it comes with a 1% penalty on interest earned.
Extension of PPF Account
After the maturity period of 15 years, a PPF account holder can choose to extend the account in blocks of 5 years with or without making further contributions. If the account is extended with contributions, the subscriber needs to submit Form H within one year from the date of maturity. During this extension period, the subscriber continues to get interest on the accumulated amount and also on the fresh contributions. If the account is extended without contributions, the amount in the account continues to earn interest, and one withdrawal is allowed per financial year. This feature makes the PPF a flexible long-term savings tool.
Loan Against PPF
A PPF account holder can avail of a loan against the balance in the account between the third and sixth financial year of opening the account. The maximum loan amount that can be availed is 25% of the balance at the end of the second financial year preceding the year in which the loan is applied for. The interest on the loan is charged at 1% per annum if repaid within 36 months. If the loan is not repaid within the stipulated time, the interest is charged at 6% per annum from the date of the loan. The second loan can be availed only after the first one is fully repaid. This feature allows account holders to meet financial emergencies without breaking their long-term investment.
PPF for Minors
A PPF account can be opened in the name of a minor by a parent or guardian. The contribution made to the minor’s account is clubbed with that of the guardian to calculate the maximum limit of ₹1.5 lakh per financial year. The guardian operates the account until the minor attains the age of 18 years. After attaining the majority, the minor can operate the account by applying along with the age proof. Opening a PPF account for a minor is a smart way to build a future corpus for education, marriage, or other major life events.
Nomination Facility in PPF
The PPF scheme provides a nomination facility where the subscriber can nominate one or more persons to receive the proceeds of the account in case of the account holder’s demise. The nomination can be made at the time of account opening or any time thereafter. The account holder can also modify or cancel the nomination at any time. In the event of the account holder’s death, the nominee(s) can claim the amount by submitting the necessary documents. If no nomination has been made, the legal heirs have to follow a longer process to claim the amount. This feature ensures that the savings reach the intended beneficiaries without legal complications.
Closure of PPF Account
A PPF account matures after 15 years from the end of the financial year in which the account was opened. Upon maturity, the account holder has the option to withdraw the entire balance along with the interest accrued. No tax is levied on the maturity amount. The subscriber also has the option to extend the account with or without contribution in blocks of 5 years each. Premature closure of the account is allowed only under specific conditions such as treatment of serious ailments or life-threatening diseases, higher education of the account holder or their dependent children, or a change in residency status to a foreign country. In such cases, a penalty of 1% less interest is levied on the entire deposit from the inception of the account.
Transfer of PPF Account
A PPF account can be transferred from one post office to another or from a post office to a bank and vice versa. This transfer facility is free of charge and helps account holders maintain continuity if they move cities or change service providers. To initiate the transfer, the account holder must submit a transfer request at the existing branch, which will then forward the documents and account details to the new branch. Once the transfer is processed, the account holder can continue contributions without any interruption. This flexibility adds convenience to managing the account over its long tenure.
E-PPF: Online Access and Management
Most major banks and post offices now offer online access to PPF accounts. This includes features like viewing account balance, downloading statements, and making online contributions through internet banking or mobile apps. Account holders can also set up standing instructions for automated contributions. While online access does not eliminate the need for physical documentation in certain cases like nomination or closure, it significantly simplifies routine transactions and monitoring. This digital shift enhances transparency and helps account holders stay on top of theiiinvestments.
Common Mistakes to Avoid
Investors often make certain mistakes while managing their PPF account. These include exceeding the ₹1.5 lakh annual deposit limit, which does not earn any interest and is also not eligible for tax benefits. Another common error is missing the annual contribution requirement, which renders the account inactive. Reactivating an inactive account requires payment of penalties along with minimum contributions for the missed years. Additionally, not understanding the withdrawal rules can lead to false expectations or financial inconvenience. Avoiding these mistakes ensures that investors derive the full benefit from their PPF investment.
Conclusion
The Public Provident Fund remains one of the most reliable long-term investment instruments in India. With guaranteed returns, tax-free interest, and tax deductions on contributions, it offers a triple advantage to investors. It also provides the flexibility of loans and partial withdrawals to handle emergencies. Its statutory backing by the government and exemption from market risks make it an attractive option for conservative investors, including salaried individuals, self-employed professionals, and homemakers. With digitised account management and the ability to extend after maturity, the PPF continues to serve as a trusted tool for building a secure financial future.