The Public Provident Fund (PPF) is a long-term savings scheme established by the Government of India, designed to encourage individuals to save for retirement while enjoying tax benefits. It offers a secure investment avenue with attractive returns, making it a popular choice among investors seeking stability and tax efficiency.
Key Features of PPF
- Interest Rate: The current interest rate for PPF is 7.1% per annum, compounded annually. This rate is subject to quarterly revisions by the Ministry of Finance.
- Investment Tenure: The scheme has a lock-in period of 15 years, which can be extended in blocks of 5 years upon maturity.
- Contribution Limits: Investors can contribute a minimum of ₹500 and a maximum of ₹1.5 lakh per financial year. Contributions can be made in lump sum or in installments.
- Tax Benefits: PPF enjoys Exempt-Exempt-Exempt (EEE) status, meaning the contributions, interest earned, and maturity amount are all exempt from income tax under Section 80C of the Income Tax Act.
- Account Holding: An individual can open only one PPF account in their name. Additionally, accounts can be opened on behalf of minors by their guardians.
Liquidity Options in PPF
Partial Withdrawals
Partial withdrawals from a PPF account are permitted from the 7th financial year after the account is opened. This means that if you opened your PPF account in the financial year 2018–19, you would become eligible for partial withdrawals starting from the financial year 2024–25.
Key Points:
- Eligibility: Partial withdrawals can be made from the 7th financial year onwards.
- Withdrawal Limit: The maximum amount that can be withdrawn is the lower of:
- 50% of the balance at the end of the 4th financial year preceding the year of withdrawal, or
- 50% of the balance at the end of the immediately preceding financial year.
- Frequency: Only one partial withdrawal is allowed per financial year.
- Tax Implications: Partial withdrawals are completely tax-free.
Loans Against PPF Balance
Loans can be availed against the PPF balance from the 3rd to the 6th financial year after the account is opened. For instance, if you opened your PPF account in the financial year 2018–19, you would be eligible to take a loan between the financial years 2020–21 and 2023–24.
Key Points:
- Eligibility: Loans are available from the 3rd to the 6th financial year.
- Loan Amount: Up to 25% of the balance at the end of the 2nd financial year preceding the year in which the loan is applied for.
- Interest Rate: The interest rate on the loan is 1% higher than the prevailing PPF interest rate.
- Repayment: The principal amount must be repaid within 36 months.
- Restrictions: Only one loan can be taken in a financial year, and a second loan is not permitted until the first is fully repaid.
Calculating the Tax-Free Corpus Over 15 Years
Let’s explore how monthly contributions of ₹6,000, ₹9,000, and ₹12,000 can grow over a 15-year period in a PPF account, considering the current interest rate of 7.1% per annum.
1. Monthly Contribution: ₹6,000
- Annual Investment: ₹72,000
- Total Investment Over 15 Years: ₹10,80,000
- Interest Earned: ₹8,72,740
- Maturity Amount: ₹19,52,740
2. Monthly Contribution: ₹9,000
- Annual Investment: ₹1,08,000
- Total Investment Over 15 Years: ₹16,20,000
- Interest Earned: ₹13,09,111
- Maturity Amount: ₹29,29,111
3. Monthly Contribution: ₹12,000
- Annual Investment: ₹1,44,000
- Total Investment Over 15 Years: ₹21,60,000
- Interest Earned: ₹17,45,481
- Maturity Amount: ₹39,05,481
Disclaimer: The information presented in this article is for educational and informational purposes only and should not be construed as financial or investment advice. Readers are advised to consult with a certified financial advisor or tax consultant before making any investment decisions.
Also Read: SIP vs PPF for Rs 90,000/year investment: Which can generate higher corpus in 15 years?
