Public Provident Fund Accounts- All you need to Know

What is a PPF account?

PPF

PPF accounts as most of you are aware of is a tax saving scheme launched by government of India. PPF scheme was 1st launched by government in 1968 and it has gained very popularity in recent years due to tax benefit and attractive interest rate offered on scheme.

Main features of the scheme are:

1. The amount deposited in PPF account can be claimed entirely towards tax saving under section 80C.

2. Maximum amount that can be invested in a FY is Rs.1,50,000/-

3. Interest earned on your saving in completely tax free.

4. Interest rates are announced by government of India for which year separately.

5. Rates at present are quite attractive when compared to fixed deposits in banks. For FY 2015-16, interest rates were 8.70 and for current FY 2016-17, interest rates are 8.10% which is still higher than FD rates.

6. The tenure of PPF account is 15 years for full withdrawal and if you wish you can keep on renewing or extending the account for another 5 years span without making additional deposit.

7. Account can be opened with a minimum contribution of Rs.100 and yearly deposit can range from Rs.500/- to Rs.1,50,000/-

8. Minimum Rs.500/- has to be deposited every year for 15 years in order to continue the account.

9. You can withdraw part amount after 7 years and full withdrawal is allowed only after 15 years.  

Who can open a PPF account?

1. PPF accounts can be opened by resident individuals who have attained an age of 18 years. Only one PPF account can be opened by a person.

2. Minors can also open PPF account operated by guardian but the total amount that can be deposited in a FY will be maximum Rs.1.50 lacs including minor ppf account and individual ppf account of guardian.

3. NRI's, HUF and foreigners cannot open a PPF account. In case of NRI's, if they have opened a PPF account before acquiring NRI status, the account can be continued till maturity without allowing any renewal or extension after 15 years. In case of HUF accounts, the restriction on opening a PPF account is imposed from 2005. Those HUF's which have opened an account before 2005 can continue the same till maturity without any renewal or extension.

Benefits/Advantages of PPF account  

1. Long term planning for retirement or for your children future. Since the maturity span of PPF account is 15 years, you can use this money after retirement and also for your son/daughters marriage or higher education.

2. Tax benefit is available for the entire amount deposited under section 80C.

3. Interest earned need not to be shown as other income and it is completely tax free.

4. Risk involved is practically nil since this is a government scheme.

5, It is easy and hassle free to open since all natioalised banks, public banks, post office and some private banks also offer this scheme and interest rates and terms and conditions are same in all.

6. One more unique feature of PPF account is that the money invested in here cannot be attached to any income tax or court order and your savings are completely safe.

Interest Rates on PPF accounts

Interest rates on PPF accounts are announced for each FY separately by government of Indian. Interest is compounded every month and is credited to the ppf account on last day of financial year, i.e., 31st March.

Interest rates for last 10 years are shown in table below:

Financial YearInterest Rates (p.a)
2016-178.10%
2015-168.70%
2014-158.70%
2013-148.70%
2012-138.80%
2011-128.60%
2010-118.00%
2009-108.00%
2008-098.00%
2007-088.00%

PPF vs Bank Fixed deposits

Both PPF account and bank fixed deposits offer risk free investment options and both are easy and hassle free to invest, however, there are certain benefits which one has over the other. You can decide the best among the two by going through following points:

Advantages of PPF over Bank Deposits:

1. PPF is a long term retirement based savings option  while FD's can be done for a maximum period of 10 years. 

2. Interest on PPF is fixed by government of India for entire year and is not much prone to fluctuation in market while FD rates keep on changing as per bank's individual policy and RBI rates.

3. PPF scheme is practically risk free to invest, however, fixed deposits being very less risky still bear the risk of bank being liquidated or insolvent.

4. Money invested in PPF account gives you tax exemption along with return. Deposits on the other hand only give tax exemption when invested in tax saver schemes for minimum 5 years.

5. Interest earned on PPF account is tax free, however, interest earned on your fixed deposits is subject to double tax as TDS is deducted on interest earned and also it is to be shown as other income for your annual IT assessment, even interest on tax saving fixed deposits is also taxable. 

6. You can take loan also on PPF deposits for 3 to 6 years, however, the same facility is not available for tax saving fixed deposits.

Advantages of Bank fixed Deposit over PPF accounts:

1. Fixed deposits can be done for a varied duration ranging from 7 days to 10 years, even tax saver deposits are for duration of 5 years while ppf accounts are opened for minimum 15 years.

2. Interest rates on fixed deposits keep on changing (may be many times a year) and this is a positive factor at times since you can opt for increased rate as and when they increase, however interest on ppf account is fixed for an entire year by government.

3. Fixed deposits can be closed prematurely (except tax saver deposits) so that you can take advantage of increased rates, the same is not available with ppf accounts.

4. You can invest any amount ranging from Rs.1000/- to crores of rupees in fixed deposits (except tax saver in which maximum amounts is Rs.1,50,000/-) as opposed to ppf account where there is a cap of Rs.1.50 lacs.