Public Provident Fund (PPF) – An evergreen investment option for all

Few months ago an elderly couple came to me for financial planning. The husband is 60 years and wife is 57 years old. Their children are well settled in their lives. They need retirement planning. They wanted to provide Rs. 50,000 per month for their retired life. Assuming life expectancy of 85, the corpus required for their retired life was 1.70 Crores (I have assumed 0% returns over inflation i.e if inflation is 6%, returns would also be 6%).

Do you know the most surprising part in their portfolio? They had around 1.65 Crores in their PPF account! Both husband and wife have PPF accounts and both opened the account when they started their first job. Though they had other investments in their portfolio like equity/debt mutual funds, Bonds, real estate, I was actually surprised to see the PPF amount as very few investors keep running their PPF account for that long.

Now they can just withdraw 6 Lakhs per year from PPF tax free for their annual expenses.  They can increase the annual withdrawal to offset inflation.

And this is the reason, I always say, PPF is an evergreen investment.

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In fact, PPF is the only investment which you can follow from the earlier generation. It is an evergreen investment option even for the new generation.

There is no need to visit post office anymore. You can open PPF account online! It takes just 5 minutes to open a PPF account online with banks like ICICI.

Public Provident Fund (PPF) is the most popular long-term savings for the risk -averse investors in India. Being a government sponsored scheme, this offers highest security. It is a 15-year scheme with tax benefits.  Let us study the PPF scheme in detail.

PPF Account Opening

PPF account opening is possible in post office, State Bank and its subsidiaries, nationalized banks etc. Now some private sector banks are allowing you PPF account. ICICI bank, HDFC bank etc are allowing you to open and transact in PPF.

Public Provident Fund (PPF) Scheme- How It Works?

It is a 15-year scheme. If your PPF was opened on 25th October 2007, it will not be maturing on 25th October 2022. The maturity of the PPF account is linked to financial year. In the example, your PPF was opened in the financial year 2007-08. So, it will be maturing 15 years from the end of the financial year 2007- 08. So, it will mature for payment on 1st April. 2023.

Public Provident Fund (PPF) Scheme – How Much I can invest per year?

This is the beauty of this Scheme. You can invest any amount between 500 and 1.5 Lakhs in a year. You need not invest in a lump sum. You can invest in up to 12 installments in a year.

You can have only one PPF account in your name. You can have another account for your minor child where you are the guardian.  In that case, the combined investment in both the account is capped at 1.5 Lakhs per year.

You can open PPF for your spouse also and invest 1.5 Lakhs per year in it. Since the entire amount from PPF is tax free, it will not have any tax implications on you.

If you miss to invest at least 500 in a year, you have to pay a penalty of 50/- for each year of default to regularize the account.

PPF Account – Interest Rates

The interest on PPF account is calculated on the lower of your accumulation between the 5th and the last day of the month. Invest before 5th of any month to earn more interest on PPF account. The PPF interest rate is decided by government every quarter and will be declared in advance (Previously it was decided every year). The current rate of interest on PPF account is 7.1% from 1st July 2020 to 31st September 2020.

What are the tax benefits in PPF?

The contribution in your PPF account will qualify for tax deduction under Section 80C along with other permissible investments. The entire interest added in your PPF account every year is also tax free. On maturity, you can withdraw the entire accumulation fully tax free. This is the main attraction of public provident fund scheme. It falls under Exempt- Exempt- Exempt category for taxation.

Can I extend the PPF after 15 years?

Yes, you can extend the PPF scheme after maturity. The extension is allowed in blocks of 5 years. Any number of extensions is possible in PPF. Suppose you are starting your PPF when you are aged 35, it will mature when you are aged 50. You can extend it twice to get the maturity at age 60 if you wish so. The best option will be to extend it even after retirement and use the annual withdrawal option to get tax free amount during retired life!

Two types of extensions are possible in PPF account. You can extent your PPF account with or without further contribution. If you are opting for extension, without further contribution, you will continue to earn interest on your PPF accumulation. In the other option, you can continue to contribute into PPF account like in the first 15 years.

If your PPF is maturing on 1st April 2023, you should apply for extension before 31st March 2024.You cannot extend it if you miss this deadline. Your PPF should be active as on date of maturity, if you want to extend it. So, ensure that you invest at least 500 every financial year in PPF.

Can I take loan from PPF?

Yes, you are eligible for loan from PPF from the 3rd financial year to the 6th financial year.

If you have opened the PPF account in the financial year 2018-2019, you will be eligible to take loan from the financial year 2020 -2021. The amount of loan will be limited to 25% of the accumulation at the end of the 2nd immediately preceding year. So, if you are applying loan in the year 2023-2024, you will get 25% of your account balance as on 31st March. 2022. You can repay the loan within 24 months. After repayment, you can still take loan within the 6th year. The effective interest will be 1% above the PPF interest rate.

PPF – Partial Withdrawal Rules

Though PPF is meant for long term savings, it offers liquidity from 7th year. You can go for 1 partial withdrawal from your PPF account every year.

PPF Withdrawal Calculator

If you have opened your PPF account in the financial year 2018 – 2019, you will be eligible for partial withdrawal from the financial year 2024-25. The withdrawal amount will be the lower of

  1. 50% of your balance at the end of the immediately preceding year.
  2. 50% of your balance at the end of the 4thimmediately preceding year.

In our example, if you are applying for partial withdrawal in 2024-25, you will get the lower of

  1. 50% of your balance as on 31st 2024
  2. 50% of your balance as on 31st 2021.

PPF withdrawal rules during the extension period of PPF

If you are opting for extension of PPF without fresh contribution, you can withdraw any amount from the PPF accumulation. But only 1 withdrawal is permitted in a year.

If you are opting for extension of PPF with fresh contribution, you are eligible for partial withdrawal of 60% of your accumulation as on the date of extension during the next 5-year period. Only 1 withdrawal is permitted in a year. This facility can be used during retired life to avail tax free withdrawal!

PPF account –Investment that cannot be attached by court

PPF account cannot be attached under any order or decree of court. If all your assets are liquidated to fulfill any of your liabilities, the entire amount in a PPF account remains with you. This makes PPF account extremely safe option for business class.

PPF for NRIs

NRIs cannot open new PPF account. But, if you have a PPF account opened before becoming an NRI, you can continue to invest 1.5 Lakhs in it every year till it complete the 15-year term. At that time, if you remain as NRI, you cannot extend the PPF.

PPF account – Ideal tool for rebalancing your portfolio

Since PPF account offers the flexibility of payment between 500 – 1.5 Lakhs in a year, you can use it for rebalancing your portfolio. When you are young, you can have less contribution to PPF account and can invest more in equity mutual funds. As your age increases, you can reduce equity and increase debt component through PPF account.

You can open a PPF account when you start working. You can use this along with ELSS mutual funds to save tax under section 80C.  When you are young, just invest small amounts in PPF and maximum in ELSS to benefit from equity. But as you are nearing retirement, increase the contribution to PPF and reduce ELSS as part of rebalancing.

If you have the amount ready, invest the entire amount of 1.5 Lakhs before 5th April every year to get interest for the full financial year. Otherwise, invest before 5th of every month to get interest for that month.

I feel PPF is a must investment option for all of us because it is the best option within the debt category.

21 thoughts on “Public Provident Fund (PPF) – An evergreen investment option for all”

  1. Yatin Thaggarse

    Excellent article.. I know a friend & his wife who grew a substantial retirement corpus by maximizing voluntary EPF contributions &PPF at 65+

  2. Highly informative. I fully agree with Mr Melvin Joseph. Every individual should open a PPF account. It will definitely help one after retirement.

  3. Not many financial planners say like this, very useful insight. I’ll retire end of 2021 and my PPF is completing is current 5 year extended period on 31.03.2021. I was thinking of closing it in April, 2021 and investing the corpus in equity MF since I won’t need it for another 5 years into my retirement.
    But now I’m thinking of extending it for another 5 year term along with contribution so that I continue to get ₹1.50 lakh 80C benefit which I’ll still require post retirement. What do you suggest; terminate PPF and invest in Equity MF or continue PPF for another 5 years?
    Thanks in advance

  4. Ramagurubaran V

    Can you elaborate on this point – “Now they can just withdraw 6 Lakhs per year from PPF tax free for their annual expenses.” isn’t the entire PPF amount is tax free? Why only 6L?

  5. Sandhya Honawar

    Excellent article. Very clear and very useful. In fact, u hav given more information than even bank staff do. I am 67 yrs old with a PPF acct in SBI, Khar branch. Overbthe years, i kept asking the staff handling PPF in SBI for info on how much money i cd withdraw & what were the rules governing PPF & noneof them cd give a clear & concise answer. They themselves dont seem to know the details. For eg, not one of them cd tell me clearly how much money i cd withdraw if i needed to. It was always vague. Also, none of them told me i cd extend the PPF acct without investing again in it. I started my PPF acct in 1985 & have kept on investing in it, so surely they cdvhave told me i cd extend it but i dont need to keep on investing money in it. So thank u fr ur article. Now i know how to maximise my investment & also how withdraw money from it if i need to.

  6. Sandhya Honawar

    Further to my above comment, i also want to add that u have given me the answer to whether i shd shut down my PPF acct at this age, since i hav started my PPF acct in 1985. The answer is obviously no. People were advising me to close down the acct but i kept hesitating & not knowing what to do. So my instinct was right. It is the best investment opportunity fr me at this time. Plus, since u hav explained in detail that one can extend it without further investment of money and / or even withdraw money fr expenditure in certain amounts, u have cleared my confusion about whether or not to extend my PPF acct. Thank u fr a wonderful, detailed & precise article. It is a handbook fr PPF. i am fwding it to all my contacts.

  7. Very useful article. Explained it very well. I also have PPF account. Now I am 50 years old. As advised by you, I will increse the amount of my subscription. I have GPF account too. Noramlly, the rate of interest of GPF and PPF are same. The formalities for loan and withdrawal from PPF is very simple in comparison to GPF. So, if we invest minimum in GPF and more in PPF, it will be helpful for us in needy occassions as we will get the money without any delay.

  8. Wonderful article Melvin. Really a eye opener for many people. You have explained the finer points of PPF in very simple way

  9. What happens when an NRI can’t extend his ppf account and doesn’t withdraw the amount. Will he be getting the interest or not?

  10. Excellent article. Have some queries though. How about PF for this couple? If they had touched PF and not PPF even in terms of loan, was there a reason?

    What will be your suggestion to someone who will not touch their investment in other modes? Say VPF? or SSY?

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