What Is Public Provident Fund?

The Public Provident Fund (PPF) scheme was started by the National Savings Organization in 1968 to promote small savings. It is an extremely popular long-term investment avenue. PPF offers an investment option with decent returns together with income tax benefits under Section 80C. Only an Indian resident citizen can open a PPF account. You can open only one PPF account. You cannot have two PPF accounts. Good news is that minors (i.e. below 18 years) can open a PPF account based on a legal age proof.

A PPF account can be opened in designated bank branches and post offices by submitting a PF account opening form, along with photograph, ID proof and address proof. There are some banks that allow you to open PF account online if you are an existing bank customer.

Steps to open a PPF account offline

1. Get an application form from the nearest post office or bank branch.
2. Fill up the application form and submit it with the required KYC documents (ID proof and address proof) and a passport-sized photograph.
3. The initial deposit required to open a post office PPF account is Rs.500 and the maximum amount allowed initially is Rs.70,000. The maximum deposit allowed in a financial year is `1.5 lakh.

Once all the documents are submitted with the initial deposit, the PPF account application will be handed over a passbook for the PPF account.

The passbook will contain all the details such as the name of the account holder, PPF account number, branch name, etc. The major benefits of opening a PPF account are: Risk-free interest rate in a scheme backed by the Central Government, the interest rate on PPF is compounded annually, avail deductions up to `1.5 lakh on investments in the PPF account under Section 80C, loan facility against balance, low investment amount (as low as `500 a year), longterm interest guarantee (i.e. 15 years and then unlimited extension for 5 year blocks) and partial withdrawal facility from the 7th financial year onwards.

Premature closure of a PPF account is allowed only after the completion of 5 years. This closure has to be for the purpose of medical treatment of family members or for the higher education of the PPF account holder. Do note that the premature closure comes at an interest rate penalty of 1%.

A PPF account can be transferred free of cost to any other branch, or any other bank, or Post Office. This is done at the request of the PPF account holder. If you do not deposit the minimum requirement of `500 a year in PPF account, it is deemed inactive. Lastly, PPF falls under the EEE (Exempt, Exempt, Exempt) tax basket. This means the investments into the PPF account are eligible for tax benefits under Section 80C, the total amount received on maturity and the interest earned is exempt from income tax. So, you do not pay any tax whatsoever.

Tip – The ideal way to maximize the interest in your PPF account would be to invest the maximum investible amount in a year at one go at the beginning of the financial year. PPF accounts follow an April-to-March year so to earn the maximum interest, you should deposit the amount before 5th of April every year.

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Author and Assistant Professor in Finance, Ardent fan of Arsenal FC. Always believe "The only good is knowledge and the only evil is ignorance - Socrates"
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