What is PPF Account? Understanding the Basics If you're looking for a long-term investment option that offers both safety and attractive returns, a Public Provident Fund (PPF) account might just be what you need. This is a popular savings scheme in India that is offered by the government to help citizens build a secure financial future. In this blog post, we'll cover the basics of what a PPF account is and how it works. What is a PPF Account? A PPF account is a savings scheme offered by the government of India, which provides individuals with a secure investment option that offers tax-free returns. The scheme was introduced in 1968 and is one of the most popular long-term savings schemes in India. PPF accounts are open to all individuals, including minors, and can be opened at designated banks, post offices, and authorized branches. The scheme has a minimum investment of Rs. 500 per annum and a maximum investment of Rs. 1.5 lakhs per annum. Deposits can be made in lump sum or in installments, with a maximum of 12 deposits allowed per year. The tenure of a PPF account is 15 years, which can be extended for an additional period of 5 years. The interest rate is determined by the government and is currently at 7.1% per annum (as of April 2023). The interest earned on a PPF account is tax-free, making it an attractive investment option for those looking to save on taxes. How Does a PPF Account Work? To open a PPF account, individuals need to submit an application form along with their KYC documents (Know Your Customer). Once the account is opened, deposits can be made through cash, cheque, or online transfer. The interest on a PPF account is calculated on the minimum balance in the account between the 5th and the end of the month. Interest is credited to the account at the end of each financial year. Deposits made to a PPF account are eligible for tax deductions under Section 80C of the Income Tax Act. Withdrawals from a PPF account can be made from the 7th year of the account opening. Partial withdrawals of up to 50% of the balance at the end of the 4th year preceding the year of withdrawal can be made. The account can be closed after the completion of 15 years, and the entire balance can be withdrawn tax-free. Let's take an example to understand how the PPF account calculation works. Suppose you open a PPF account with an initial deposit of Rs. 50,000 on April 1, 2021. You decide to invest Rs. 5,000 per month in the account. Assuming that the interest rate remains constant at 7.1%, here's how the calculation would work: Year 1: Opening balance: Rs. 50,000 Annual deposit: Rs. 60,000 (12 monthly deposits of Rs. 5,000) Interest earned in the year: Rs. 4,758 Closing balance: Rs. 1,14,758 (opening balance + annual deposit + interest earned) Year 2: Opening balance: Rs. 1,14,758 Annual deposit: Rs. 60,000 (12 monthly deposits of Rs. 5,000) Interest earned in the year: Rs. 8,641 Closing balance: Rs. 1,83,399 (opening balance + annual deposit + interest earned) Year 3: Opening balance: Rs. 1,83,399 Annual deposit: Rs. 60,000 (12 monthly deposits of Rs. 5,000) Interest earned in the year: Rs. 13,334 Closing balance: Rs. 2,56,733 (opening balance + annual deposit + interest earned) And so on for the next 12 years until the completion of the 15-year tenure. It's important to note that the interest earned on a PPF account is compounded annually. This means that the interest earned in each year is added to the opening balance of the following year, and the interest is calculated on the new balance. Conclusion A PPF account is a popular savings scheme in India that offers individuals a safe and secure investment option with tax-free returns. The scheme has a minimum investment of Rs. 500 per annum and a maximum investment of Rs. 1.5 lakhs per annum. The interest rate is determined by the government and is currently at 7.1% per annum (as of April 2023). The scheme has a tenure of 15 years and can be extended for an additional period of 5 years. Withdrawals can be made after the 7th year, and the entire balance can be withdrawn tax-free after 15 years.
