What is PPF account? PPF interest rate? What are the benefits and disadvantage of PPF ? Everything about PPF account

 PPF

It is a common term used for saving money . Now, what is this PPF. PPF i.e, public provident fund introduced by government. Public provident fund is a scheme , a popular long term  investment option backed by the government of India . And where it is introduced by the government , it automatically becomes risk free . PPF is fully guaranteed scheme by the government. PPF gives an agreeable rate of interest and returns on investments. PPF has a tenure of 15 years which, however, can be extended by 5 years on application by the subscriber whereas partial withdrawal is also allowed in some cases.

PPF has many benefits in terms of interest rates, safety and relaxation.

Now, what are its benefits:-

* PPF interest rates benefits. The rate of interest in PPF is revised every quarter by the government of India .The PPF interest rate has historically been around 7.6% to 8%. It tends to move slightly higher or lower depending on the overall economic scenarios.

Period               Interest Rate(%)

April to June 2020     7.1%

January to March 2020 7.90%

October to December 2019 7.90%

July to September 2019 7.90%

April to June 2019      8.0%

January to March 2019   8.0%

October to December 2018   8.0%

July to September 2018   7.6%

 The extension of tenure is of 15 years, after which they can withdraw the amount which comes under tax exemption.

• Tax benefits of PPF.
• The Public Provident Fund provides tax benefits under Section 80C of the IT Act, 1961. PPF allows income tax deductions up to Rs.1.5 lakh on the amount invested in the scheme.
• For example, if your annual income is 5 lakhs and you invest 1.5 lakh in PPF , then your tax will considered on 3.5 lakh of your income, and you are easily saving 1.5 lakhs directly from your income because your income will be considered only 3.5 lakhs whereas it is 5 lakhs in actual .

• Investment security in PPF 
• As the scheme is introduced by the government , so subscribers enjoy safety of investment in public provident fund.Generally, the people who are reluctant to take any risks and benefit from a fixed rate of interest opt to invest in this fund. Moreover, the interest earned is backed by sovereign guarantee which also makes it safer than bank interest. In comparison, bank fixed deposits are only insured up to Rs 1 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

• Lacility of loans against PPF
•  The subscribers are allowed to take loan from 3rd and the 6th year of opening the account .The subscribers are allowed to take loans against their PPF account at an agreeable interest rate. It is especially beneficial for the investors who want to apply for short-term loans without having to pledge any collateral securities.
• The maximum amount of loan that can be availed against PPF accounts is 25% of the balance at the end of the 2nd financial year preceding the year in which the loan was applied for. 
• The loan amount can be repaid in 36 months from the first day of the month succeeding the month in which the loan was taken. For example,  if a loan was sanctioned in 20th March,2020, then the tenure of the repayment of loan will start from 1st April,2020.
• The interest rate payable on loans taken against PPF accounts is 2% higher than the prevailing interest rate on PPF accounts. Suppose  the existing interest rate  of PPF account is 10%,then the interest payable on a loan  taken  on such account will be 12%.This can be lower than the interest charged by several banks and you do not need any additional security.

• Partial withdrawal
• PPF is a long term scheme with a lock-in period of 15years. However, partial withdrawal can be made from the 7th year after opening of the account. For example if the account was opened on  1st Jan , 2013-14 then the withdrawal can be made from the financial year 2020-21 onwards.
• But, it is suggested that one should check with the respective website of the bank to determine when partial withdrawal is allowed. Some banks, such as ICICI and Axis, allow withdrawals after 5 years and some after 7 years (SBI and HDFC).Only one partial withdrawal is allowed per financial year. 
• The maximum amount that can be withdrawn per financial year is the lower of following:

• 50% of the account balance as at the end of the financial year, preceding the current year, or
• 50% of the account balance as at the end of the 4th financial year, preceding the current year.

• PPF as a pension tool.
• PPF can be treated as a good Pension scheme if a subscriber extends the scheme tenure without opting for further contributions.  Let us assume that you have Rs. 1 crore in your PPF account. The PPF interest rate is 7.1% per annum which implies that your account will earn Rs.8.5 lakh interest income in a year (tax exempted). Now, you can withdraw this interest income keeping the principal amount the same. Similarly, if the interest rate remains the same, you will be able to earn 8.5 lakhs of interest (or you can say pension) per year.  PPF can be considered better than other pension scheme because in the case of PPF there is no tax to be paid.

• Transparency calculation 
• The PPF amount is compounded on an annual basis according to the declared interest rates. The interest rate is declared after every quarter of the year  so benefits will be the weighted average of each rate.

Few disadvantages of public provident fund are:-  

   

•  Fixed interest rate:- PPF investment have fixed interest rate which may not always keep pace with inflation. In 2010 and 2011, inflation went into double digits but the PPF interest rate remained at 8%.

• Lower returns than mutual funds:- NPS,Mutual Funds and NPS have an equity component and hence they  provide higher returns than PPF in the long term.

• Less flexibility:- There  are limitations on withdrawal from PPF. It allows withdrawals from the 7th financial year after the year of account opening. It allows partial withdrawal of 50% of the balance  in the PPF account. In terms of loans, there are similar restrictions such as when it can be taken (3rd to 6th year from account opening) and how much (25% of the account balance in the 2nd year preceding the year of account opening.

• Taking the analysis and making a review still PPF can be opted as a better option to invest and save money.  PPF can be opened through post office but now private sector banks also provide the facility of opening a PPF account.

• List of Banks Offering PPF Account:-
• Allahabad Bank (online facility available)
• Axis Bank (online facility available)
• Bank of Baroda.
• Bank of India (online facility available)
• Bank of Maharashtra.
• Canara Bank (online facility available)
• Central Bank of India (online facility available)
• Corporation Bank. 
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