PPF - Public Provident Fund: Tax-Free Saving Tool in India

What is PPF?

A voluntary savings instrument in India to mobilize small savings over a period, generating tax-free interest returns to the person. It provides a mechanism for self-employed professionals to save for retirement needs. The guarantee by the Central Government also adds to the low-risk nature of this fund.

Who can open it / eligibility?

Only a resident individual can open a PPF account.
A minor individual can open one with the help of a legal guardian.
Non-resident Indians are not allowed to open a PPF account. However, existing PPF accounts can continue to be operated if a resident becomes a non-resident (though such balance cannot be taken out of the country).

Restrictions

Only one PPF account can be held by any individual.

Lock-in period

Original tenure of 15 years. This can be extended by one or more blocks of 5 years each. Funds cannot be withdrawn during the lock-in period until maturity, though partial withdrawal is allowed from the end of the 6th year.

Tax status — EEE (Exempt, Exempt, Exempt)

Contribution to PPF is exempt under Section 80C (up to ₹1,50,000 a year, from 2014–15).
Interest earned is exempt.
Amount withdrawn on maturity is fully exempt.
The balance in PPF is also exempt from wealth tax.

Loan facility

A loan can be taken between the 3rd and 5th year. The rate after 1 December 2011 is 2% more than the interest on PPF (1% for loans up to 30 November 2013). A maximum of 25% of the balance at the end of the 2nd immediately preceding year is allowed as a loan, and withdrawals must be repaid within 36 months. A second loan is available between the 3rd and 6th year, and only if the first one is fully repaid. Inactive accounts are not eligible for a loan.

Minimum amount

A minimum of ₹500 must be contributed every year, or a penalty of ₹50 is charged.

Maximum amount

₹1,50,000 in a year (lump sum, or in a maximum of 12 instalments).

Interest earned

8.7% p.a. as per rates published by the government each year. Compounded annually and calculated on the lowest balance between the 5th and last day of the month. Interest is credited on 31 March every year.

Guarantee

The amount is fully guaranteed by the Central Government. The balance also cannot be attached by way of any court order, except for recovery of tax dues by income tax authorities.

Where to open

The account can be opened at any post office in India, or with certain banks such as State Bank of India or ICICI Bank. It's also possible to shift accounts between banks free of charge. Certain private banks have been authorised to operate PPF accounts as of 2014.

Risk

Extremely low.

Nomination

Can be specified as a percentage share at any point in time. The proceeds will be given to the nominee on the death of the account holder.

Originally published January 2015. Interest rates, contribution limits, and account rules for PPF are revised periodically by the government — always check the current rate and limits before acting on this.