Public Provident Fund (PPF) Explained

The Public Provident Fund is a sound savings cum tax saving instrument in India. Started in 1968 by the National Saving Institute of the Ministry of Finance. It is a long term saving instruments with stable return and zero capital risk, bundled with tax savings feature giving extra edge.

Should you open a PPF account?

This is ideal for an individual who are risk averse. Having said that, I personally feel, everyone should have this as a part of their investment strategy. This can be used to allocate debt component of the portfolio. Obviously with the limits, which we will see further below.

Who can open a PPF account?

Any individual Indian citizen residing in India can open PPF account. Parent can open account in the name of minor children. While opening account for minor, one of the parent’s PAN is required. Remember, tax savings will continue to be at Rs 1,50,000 for both account put together i.e. of parent and minor child.

You cannot open Join account, it's for individual.

Non-residents are not permitted to operate PPF account but can continue the existing account till it matures. No further extension of 5 years is available, once it matures.

Hindu Undivided Family as known as HUF is no longer permitted to open PPF account (notification no GSR 291(E) dated May 13, 2005). In order to claim deduction u/s 80C, HUF can contribute to the PPF account of its members and claim tax deduction

Who can open PPF account?

Where you can open PPF account?

You can open PPF account in either Post Office or Bank.

Banks accepting the PPF accounts are - designated branches of State Bank of India and its subsidiaries, ICICI bank, Axis bank, HDFC bank and few others.

Amount of deposit

Minimum deposit in each financial year should be of Rs 500 and maximum can be Rs 1,50,000

Deposits can be made in multiple of Rs 50 and any number of times in a financial year. Earlier, a maximum of 12 deposits were only permitted in a financial year.

PPF Investment Limit

You can see the power of compounding very well in this instrument. For example, considering interest rate stay at 7.1% and you continue to invest annually to the maximum permissible investment of Rs. 1,50,000 at the beginning of the year – over 15 years, you will end up with sound corpus of Rs. 40.7 lakhs. You can see by Year 10, interest compounding is significant and interest earned is becoming higher compared to the amount deposited each year.

PPFReturn

(Tip - You can use excel built in function FV to do the quick calculation)

Interest Rate

Interest rate is fixed by the Finance Ministry every quarter. The current PPF interest rate is 7.1%. Though the interest is calculated every month, it gets credited to your account on 31st March every year. Also, the PPF interest is calculated on the minimum balance between the fifth and the last day of the month.

For example: You have a balance of Rs 1 lakh in your PPF account on 30th April. Now, let's imagine you deposit ₹10,000 in your PPF account on 3rd May and ₹5,000 on 30th May. Now, the interest on your fund for the month of May will be calculated on Rs 1.10 lakh and not Rs 1.15 lakh

Taxation

Investments up to Rs. 1.5 lakh is eligible for tax deductions under Section 80C

PPF falls under EEE Category, i.e. Exempt – Exempt – Exempt, which basically means

The amount you deposit is tax exempt [under Section 80 C]
The interest on deposit is tax exempt [under Section 10(15)]
Final maturity amount is also tax exempt

Note:

  • Always disclose Interest earned in PPF account as part of Exempt income in your tax returns
  • All the balance that accumulates over time is exempted from wealth tax computation

Inactive PPF account

For any reason, if you do not deposit minimum amount of Rs. 500 in any financial year, account gets inactive. However, to re-activate, you can pay the minimum amount of Rs. 500 for each financial year you have not deposited together with nominal penalty of Rs. 50 for each such financial year and get your account re-activated.

Lock in period & Premature closure

The minimum lock-in period of a Public Provident Fund is 15 complete financial years from the end of the year in which the account was opened . On maturity, you can withdraw your entire corpus. If you wish to continue for a longer period, you can continue to do so (with or without making additional contributions) by applying for the extensions in 5 year blocks. There is no limit on how many time you can extend after the initial lock-in period of 15 years.

PPF Lockin Premature closure

One can prematurely close the account after 5 years from the opening of account under specific circumstances

  • Treatment of life threatening disease of the account holder, his spouse or dependent children or parents, on production of supporting documents and medical reports confirming such disease from treating medical authority
  • Higher education of the account holder, or dependent children on production of documents and fee bills in confirmation of admission in a recognised institute of higher education in India or abroad
  • On change in residency status of the account holder on production of copy of passport and visa or income tax return

Premature closure of PPF accounts will lead to 1% lower interest than the rate at which interest is credited to the account

Loan against PPF account

An advantage of PPF accounts is that you can take a personal loan against the balance in your PPF account provided your PPF investment is not due for withdrawal. This loan can be availed between the third and the sixth financial year of opening the account. The loan amount is limited to 25% of the balance at the end of the second financial year prior to the year in which you applied for the loan. You are not required to pledge a collateral when taking a loan against your PPF account.

Under the new rules, the rates at which the account holder can borrow from his account has been reduced to 1% above the prevailing PPF interest rate, from 2% earlier. In case of death of the account holder, the nominee or legal heir shall be liable to pay interest on the loan availed by the account holder but not repaid before his death. Such amount of due interest shall be adjusted at the time of final closure of the account.


Summary of the salient features of PPF account:

  • Deposit any amount between Rs. 500/- (minimum) and Rs. 1,50,000/- (maximum) in a financial year
  • Current Rate of Interest Payable (Currently as on Oct 20, it is 7.1%)
  • Loan facility is available from 3rd financial year up to 6th financial year
  • One withdrawal is permissible every year from 7th financial year
  • Account matures on completion of 15 complete financial years from the end of the year in which the account was opened
  • After maturity, account can be extended for any number of a block of 5 years with further deposits
  • Account can be retained indefinitely without further deposits after maturity with the prevailing rate of interest
  • Deposit in PPF account is qualified for deduction under Sec 80C of Income Tax Act
  • Interest earned in PPF account is completely exempted from Income Tax under Sec 10(15) of Income tax Act
  • The amount in the PPF account is not subject to attachment under any order or decree of a court of law

Frequently Asked Questions

Q: Can you open 2 PPF account?

A: No, only one PPF account can be opened by an individual

Q: Can I close my PPF account early?

A: Under specific circumstances, you can withdraw after completion of 5 years. So for example, if you open an account in Jan 2020, you can begin making partial withdrawal starting FY 2025-26

Q: Can I extend PPF account for 4 years after maturity?

A: No, extensions can be done only in block of 5 years

Q: I deposited amount in my child’s name, can I claim benefit?

A: Yes, if your PAN is used to open the minor’s account, you can claim the benefit of deposit. However, overall deposit cannot exceed Rs. 1,50,000 and so the benefit.

Q: Can I transfer my PPF account?

A: Yes, you can transfer your PPF account from one branch to another

To conclude, it’s one of the most wonderful investment option for risk averse investor.

Resource: Historical PPF interest rates

Period Rate of Interest
1968-69 4.80%
1969-70 4.80%
1970-71 5.00%
1971-72 5.00%
1972-73 5.00%
1973-74 5.30%
1 Apr 1974 to 31 July 1974 5.80%
1 Aug 1974 to 31 Mar 1975 7.00%
1975-76 7.00%
1976-77 7.00%
1977-78 7.50%
1978-79 7.50%
1979-80 7.50%
1980-81 8.00%
1981-82 8.50%
1982-83 8.50%
1983-84 9.00%
1984-85 9.50%
1985-86 10.00%
1 Apr 1986 to 31 Mar 1999 12.00%
1 Apr 1999 to 14 Jan 2000 12.00%
15 Jan 2000 to 28 Feb 2001 11.00%
1 Mar 2001 to 28 Feb 2002 9.50%
1 Mar 2002 to 28 Feb 2003 9.00%
1 Mar 2003 to 30 Nov 2011 8.00%
1 Dec 2011 to 31 Mar 2012 8.60%
1 Apr 2012 to 31 Mar 2013 8.80%
1 Apr 2013 to 31 Mar 2016 8.70%
1 Apr 2016 to 30 Sep 2016 8.10%
1 Oct 2016 to 31 Mar 2017 8.00%
1 Apr 2017 to 30 Jun 2017 7.90%
1 Jul 2017 to 31 Dec 2017 7.80%
1 Jan 2018 to 31 Sep 2018 7.60%
1 Oct 2018 to 30 Jun 2019 8.00%
1 Jul 2019 to 31 Mar 2020 7.90%
1 Apr 2020 to 31 Dec 2020 7.10%

What is Repo and Reverse Repo Rate?

If you are tuned to stock market or general economic news, you would have heard this term come up every time there is central bank’s credit policy meet. Here’s an attempt to explain what does this rate mean? and how does it affect you?

What is Repo Rate?

We all put our money in bank or borrow from bank at particular interest rate. Similarly, rate at which central bank (in case of India – Reserve Bank of India aka RBI) lends money to commercial banks in the event of any shortfall of funds is called Repo rate. 

Why is it important?

This is very important tool for authorities to control inflation. In case of inflation, the central bank increase repo rate as this acts as disincentive for commercial banks to borrow from the central bank. Which effectively reduced the money supply in the economy and thus helps in arresting inflation. 

Let’s just summarize above explanation

  • Repo Rate serves as control mechanisim for the central bank for increasing / decreasing liquidity in the economy
  • Change in Repo Rate impacts the cost of borrowing for commercial banks
  • It is a key tool used by the central bank to fight inflation and achieve price stability in the economy
  • Repo rate changes can lead to changes in interest rates from deposits and interest rate applicable to loans

What is Reverse Repo Rate?

This is exactly opposite of Repo Rate. This signifies the rate at which the central bank (RBI) borrows money from the commercial banks. 

An increase in reverse Repo Rate will decrease money supply in the economy and vice-versa. Increased Reverse Repo Rate will incentivise the commercial bank to park their funds with central bank and vice-versa.

RBI Repo Rate explained


Both this rate forms part of central bank’s monetary policy instruments which helps in controlling the money supply in the country and thereby controlling the inflation.

Calculator: Return on SIP investment

Most suggested route in personal finance world to achieve long term financial goal is via making regular investment or popularly known as Systematic Investment Plan or SIP.

Now, this brings important questions

  • How much you can expect to save, if you invest an X amount for Y period at expected rate of Z%?

  • How much return will differ, if I save at the beginning of the month or at the end of the month?

  • What is the absolute return %?

  • What is the effective annualized return? etc.

To answer this basic questions, I have made small Excel spreadsheet, feel free to download from here and play around.

Excel Calculator - SIP Return

Drop in a comment for any feedback.


Basics of Dividend Yield

What is Dividend?

Companies distribute a portion of their profits to shareholders, which is called dividend. In Indian market, dividends are generally issued as Interim or Final. Interim means dividends issued during the year, while Final dividend means the amount issued at the close of the financial year.


What Is Dividend Yield?

Dividend yield is always expressed as a percentage (%) – this is the ratio between dividend and stock price. This is used to measure the amount of cash Dividend company pays as a % to it’s stock price.


Dividend Yield

Understanding this % a bit more

It’s important to remember, the stock price will vary at any given point of time – this makes the Dividend Yield % very dynamic. For instance, a Company is issuing Rs 10 as annual dividend, when the stock price is at Rs 200 – dividend yield would be computed as 10 / 200, i.e. 5%. Now if Company’s stock price drops to Rs 100 and still continues to issue Rs 10 as annual dividend – dividend yield would be 10% (i.e. 10/100). You can see, there is huge growth in dividend yield % at cost of drop in share price.

Myth

High dividend yield are safe. This is absolute myth - classic case in Indian market is Coal India. Following chart says it all:

Important

- It's important to understand Dividend taxability while planning to build Dividend portfolio
- Dividend yield should not be sole criteria while building dividend portfolio. It's important to see the growth trends, moat of the Company etc.

You can check out the list of Government companies having high divided yield here at StockXplain site.