Public Provident Fund Scheme (PPF) – Interest Rate 2023 | Withdrawal | Tax Benefits

The Public Provident Fund (PPF) was initially introduced in 1968. PPF was introduced to enhance the habit of savings and investment for security after retirement. Investment in PPF provides twofold benefit to the investor: firstly, it enables them to build a corpus for retirement benefits. Secondly, it also provides deduction under section 80C of the Income-Tax Act.

Table of Contents:

1. What is Public Provident Fund?
2. Public Provident Fund Overview
3. PPF Minimum Deposit
4. PPF Interest rate
5. PPF Withdrawal
6. PPF Premature Closure
7. Closure of account
8. Extension of account after maturity
9. Loan against PPF
10. Protection against attachment of balance
11. Can an NRI open an account under the PPF Scheme
12. Tax treatment of investment in PPF

1. What is Public Provident Fund?

The Public Provident Fund (PPF) saving schemes is a tax-free investment avenue open to all individuals. The Government had brought the scheme to encourage the saving and investment habits among the individuals. Initially, the scheme was notified vide GSR 1136, dated 15-06-1968, and many amendments have been carried out since then. Now, the Government has notified a new scheme vide G.S.R. 915(E), dated 12-12-2019.

• • The minimum deposit required is ₹500, with a maximum limit of ₹1,50,000 in a financial year.
  • A loan facility is available from the third to the sixth financial year.
  • Withdrawals are permitted every year beginning from the seventh financial year.
  • The account matures upon completing fifteen full financial years from the end of the year it was opened.
  • Post maturity, the account can be extended for any number of 5-year blocks with additional deposits.
  • After maturity, the account can be maintained indefinitely without further deposits while earning interest at the prevailing rate.
  • The funds in the PPF account are not subject to attachment under any court order or decree.
  • Deposits qualify for deductions under Section 80-C of the Income Tax Act.
  • The interest earned in the account is exempt from Income Tax under Section 10 of the Income Tax Act.

2. Public Provident Fund Overview

2.1 Public Provident Fund Eligibility

The PPF accounts can be opened at any nationalised bank, authorised bank or post office. The PPF account can be opened by submitting Form 1, the relevant documents, and the minimum deposit.

2.2 Can I Open two PPF Account?

An individual can open only one account in his name under the PPF scheme. Additionally, an individual can open one PPF account each in the name of a minor or a person of unsound mind whom he is the guardian (legal or natural). It shall be noted that only one account shall be opened in the name of any minor or person of unsound mind by any of his guardians. Joint accounts cannot be opened under this scheme.

2.3 Consequences of failure to deposit minimum amount in the account

If the depositor fails to deposit the minimum amount in the account in the following years, such account shall be considered discontinued. However, such an account can be revived during its maturity period on payment of a penalty of Rs.50 for each year of default along with the minimum annual deposit, i.e. Rs.500, for years of default. The amount of fee deposited shall not be included while computing the amount deposited in the account by the investor.

When a PPF account is considered discontinued, the account holder shall only be eligible to open a new account after the closure of such account after maturity. Further, the loan and partial withdrawal facility shall not be available.

Even if the discontinued account is not revived, the balance in such account shall continue to earn interest at the rate applicable to the scheme from time to time.

3. PPF Minimum Deposit

Deposits in the account can be made in a lump sum or instalments during the year. The maximum limit prescribed under the scheme shall include the deposits made in his account and the account opened on behalf of the minor.

(a) The account may be opened with an initial investment of Rs.500 and in multiples of Rs.50 after that;

(b) Minimum deposit to be made in the account during every financial year shall be Rs.500; and

(c) The total amount deposited in an account shall not exceed Rs.150,000 during a financial year. The limit shall include all the amounts deposited by the individual in his account and the account opened on behalf of the minor.

4. PPF Interest rate

Interest shall be calculated for the calendar month on the lowest balance at the credit of an account between the close of the fifth day and the last day of the month. The interest shall be credited to the account at the end of each financial year.

Applicable rate of interest in different periods

5. PPF Withdrawal Rules

5.1 When amount can be withdrawn?

The amount from the PPF account can be withdrawn before maturity only after the expiry of 5 years from the end of the year in which the account was opened. If the account is opened on behalf of a minor or person of unsound mind, withdrawal can be made at any time for their benefit, provided they are alive.

5.2 Limit on the amount to be withdrawn

The amount that can be withdrawn from the PPF account shall be a maximum of 50% of the amount standing in the account’s credit at the end of the fourth year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower.

Where after maturity, the account has been extended with deposits, total withdrawal during the block period of 5 years shall not exceed 60% of the balance at credit at the commencement of the block period. Such withdrawal can be made either in a single or in yearly instalments. If, however, the account holder opts to extend the account without any further deposit, no additional withdrawal will be allowable.

5.3 How to Withdraw PPF Amount?

The application shall be made in Form 2. However, if the withdrawal is made from the account on behalf of a minor or person of unsound mind, then a certificate is required to be submitted by the guardian.

5.4 Other conditions

If the account holder has obtained any loan against such account, he is required to repay the amount of loan outstanding, including the interest due thereon, before making an application for such withdrawal;

• The facility of withdrawal is available only once a year;
• Withdrawal cannot be made from a discontinued account, and
• Withdrawal cannot be made in case of an extension of the account wherein the account holder opts not to deposit any amount further.

6. PPF Premature Closure

The account holder shall be allowed to close his account prematurely, or the account opened on behalf of a minor or a person of unsound mind of whom he is a guardian on or after the expiry of 5 years from the end of the year in which the account was opened, in any of the following cases:

(a) The amount is required for treatment of a life-threatening disease of the account holder, his spouse or dependent children or parents, on the production of supporting documents and medical reports confirming such condition from the treating medical authority;

(b) For higher education of the account holder or dependent children on the production of documents and fee bills in confirmation of admission in a recognised institute of higher education in India or abroad;

(c) If there is a change in residency status of the account holder on production of a copy of Passport and Visa or Income tax return.

In case of premature closure, the interest, whether credited or due, shall be calculated at a rate which shall be 1% lower than the rate at which the interest has been credited in the account from time to time since the date of opening of the account or the date of extension of the account. The application for premature closure of the account shall be filed in Form-5.

7. Closure of account

In the event of the account holder’s death, the account shall be closed, and no nominee or legal heir shall be allowed to continue the account. The balance, including the interest calculated till the end of the month preceding the month in which the balance is deposited in the account, shall be paid to the nominee or legal heir as the case may be.

In other cases, the account holder can, at any time after the expiry of 15 years from the end of the year in which the account was opened, apply for the closure of the account by using Form 3. The account holder will be eligible to withdraw the whole amount along with the interest due up to the last day of the month preceding the month the account is closed.

8. Extension of account after maturity

8.1 Extension without making any additional deposit

The account holder may opt not to close the account after its maturity and retain it without making any further deposit in the account. If the person opts to extend the account without making further deposits and does not deposit any amount for more than a year, then he will not have the option to continue with the account with a deposit. Interest will accrue on the amount lying in the account at the rate applicable to the scheme. The account holder can withdraw the amount from the account at any time during the year. But such withdrawal can be made only once a year.

8.2 Extension of account with deposits after maturity

The holder can extend his account’s validity for a further block of 5 years and make deposits therein. The person has to make an application in Form-4 for this purpose.

The extension with deposits shall be allowed subject to the fulfilment of the following conditions:

(a) The extension will be granted for a block of 5 years only. If the account holder opts to extend for more than five years, he may apply for another extension of a block of 5 years accordingly;

(b) An application made for the extension of the account cannot be withdrawn subsequently;

(c) The option for extension shall be exercised before the expiry of 1 year from the account’s maturity. In case of an account opened on behalf of the minor or a person of unsound mind, the period may be extended at the request made by the guardian.

In case of failure of intimation as required above, any deposits made in the account shall be treated as irregular and refunded by the accounts office immediately without interest. However, the balance in the account on the date of maturity shall continue to earn interest up to the end of the month preceding the month of closure;

(d) If the account is continued with deposits for one or more five block periods, the account holder may leave the account without deposits on completion of any block period;

(e) The accountholder himself shall make the application for extension of another block except in case of a minor or person of unsound mind, wherein the application can be made at the request of the guardian;

(f) All the provisions as applicable under the normal deposit period shall also apply during the extended period;

(g) Facility of partial withdrawal will also be available during the extended time, provided the total amount withdrawn does not exceed 60% of the balance at credit at the commencement of the block period.

9. Loan against PPF

9.1 When can the loan be obtained?

The account holder may apply for a loan against the balance in the PPF account after the expiry of one year from the end of the year in which the initial investment was made but before the expiry of 5 years from the end of the year in which the initial investment was made. The loan can be applied by furnishing details in Form-2.

In case of the account opened on behalf of a minor or a person of unsound mind, the guardian may apply for obtaining a loan provided the amount is to be utilised for the benefit of such person, and he shall be alive when making the application.

9.2 How much loan can be applied for?

The maximum amount for which the application for obtaining a loan can be made is 25% of the amount standing in the account’s credit at the end of the second year immediately preceding the year the loan was applied.

For example, Mr. X made his initial investment on 01-01-2020 for Rs. 100,000. During the year 2020-21, he deposited Rs. 150,000. He will be eligible to apply for the loan on or after 01-04-2021. If he applies for a loan on 15-09-2021, the maximum amount he can apply for will be Rs. 25,000 (Rs. 100,000 * 25%). In 2022-23, the maximum loan can be obtained to Rs. 62,500 (Rs. 250,000 * 25%).

9.3 Other conditions for obtaining the loan

An additional loan will be granted to the account holder if the earlier loan has been repaid in full, together with interest. Further, only one loan can be given in a year.

9.4 Rate of interest

Interest shall be charged at the rate of 1% per annum of the principal for the period commencing from the first day of the month the loan is drawn up to the last day of the month in which the last instalment of the loan is repaid. Interest shall be paid in two monthly instalments.

If the loan is not repaid within 36 months from the first day of the month following the month the loan was sanctioned, interest shall be charged at 6% per annum. Such interest shall be applicable from the first day of the month following the month the loan was obtained to the last day of the month when the loan is finally repaid.

9.5 Repayment of loan

The loan can be repaid in either lump sum or instalments. Repayment shall be made within 36 months from the first day of the following month the loan was sanctioned.

After the principal amount of the loan is fully repaid, the account holder shall pay interest in at most two monthly instalments. In case of default in interest payment, the amount due shall stand to the debit of the holder’s account at the end of each year. Following are the scenarios when the payment of interest shall be regarded as defaulted:

(a) Interest on outstanding loan which is not paid before the expiry of 36 months or paid partly;

(b) Interest on the loan is not paid for the principal amount already repaid.

In case of the accountholder’s death, his nominee or the legal heir shall pay the interest amount. Such an amount can be adjusted from the balance in the account at the time of final closure of the account.

10. Protection against attachment of balance

The amount standing the credit of the account shall not be liable to attachment under any order or decree of any court in respect of any debt or liability incurred by the account holder.

11. Can an NRI open an account under the PPF scheme?

The previous PPF scheme prohibited non-residents from making any investment in the PPF. The new scheme does not contain any provision which prohibits the non-resident. Thus, any individual, whether resident or non-resident, can opt for this scheme.

However, to open an account under the scheme, the applicant must apply Form 1, which declares that the applicant is a resident citizen of India. It is unclear how this residential status shall be determined – as per Section 6 of the Income-tax Act or Section 2(v)/2(w) of the FEMA Act.

Thus, if the applicant is a non-resident of India (under both the Act) or a foreign citizen, he will not be eligible to sign such a declaration. So, despite removing the prohibition from the scheme, Form-1 will restrict a non-resident citizen from signing and submitting the application in Form 1. If at any time after opting for the scheme, the accountholder becomes a non-resident, then unlike the previous scheme, he will not be required to close the accounts and must file a declaration to an accounts officer regarding his change in residency.

12. Tax treatment of investment in PPF

PPF deposits fall under the EEE (Exempt, Exempt, Exempt) tax category, which means an investor is not liable to pay tax at all three levels – investment, earning and withdrawal.

Investment made in the PPF Scheme is eligible for deduction under Section 80C of the Income-tax Act. However, suppose any loan is taken against the PPF account. In that case, any amount paid towards the repayment of such loan shall not be included in the contribution amount of PPF while determining the deduction under Section 80C. Any amount withdrawn from the account is exempt from tax under Section 10(11). However, interest shall be exempt to the extent of a specific limit only.