The Public Provident Fund (PPF) has gained popularity as a preferred savings scheme with tax-free returns and assurance of both principal and interest by the government. In this guide, we analyze nine important features, including the rules and benefits of PPF accounts for anyone who wants to know who can open an account and what types of deposits are allowed, interest rates offered on these accounts along with limits imposed as well as restrictions placed upon ruling out minors from opening such schemes among other things.
New Rules of PPF Account
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Eligibility and Account Opening
The PPF is intended for a 15-year period and allows unlimited extensions in blocks of five years. The PPF account can be opened by people of any age, even if they have an EPF account. The account can be opened in a selected post office, bank branch, or online with banks.
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Deposits and Interest
One can deposit into a PPF account a maximum of 12 times per year, with the requirement to deposit before the 5th of the month to accrue interest for the entire month. The interest is calculated based on the lowest monthly balance. Lump-sum deposits at the beginning of the financial year are allowed. Loans and partial withdrawals are also permissible under specified conditions.
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Interest Rate Dynamics
PPF is a debt-oriented asset class, shielding investments from equity market volatility. The government sets the interest rate quarterly, linked to the yield of government securities. Historical interest rates have varied, ranging from 4% in 1968-69 to 12% from 1986-2000. As of the December 2023 quarter, the interest rate stands at 7.1%.
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Deposit Limit and Tax Implications
The annual minimum deposit to keep the account active is Rs 500, while the maximum is Rs 1.5 lakh. Contributions beyond this limit are considered irregular, attracting no interest and disqualifying for tax benefits under Section 80C. Excess amounts are refunded without interest.
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PPF for Minors
Either parent can open a PPF account for a minor, but not both. Grandparents can open an account only if appointed as legal guardians after the parents’ demise. PPF rules disallow grandparents from opening accounts for minors when the parents are alive.
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Number of Accounts
An individual can open only one account in their name, either in a post office or a bank, with a declaration required in the application form. If a second account is mistakenly opened, it is treated as irregular and won’t accrue interest unless amalgamated with the first. Approval from the Ministry of Finance is necessary for amalgamation.
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Premature Closure
Previously limited to loans and partial withdrawals, premature closure is now possible after five financial years on specific grounds. Valid reasons include treatment for serious ailments or life-threatening diseases of the account holder, spouse, dependent children, or parents. Premature closure is also allowed for higher education purposes with relevant documentation.
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Nomination
Nomination is a critical aspect of PPF accounts. While the application form (Form-A) does not include provisions for nominations, it is crucial to fill out the separate nomination form (Form-E) during the account opening to ensure a smooth process for nominees in the future.
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Investment Recommendations
PPF suits investors seeking stability in returns without the volatility associated with equity. However, for long-term goals with a high inflation-adjusted target, it is advisable to incorporate equity exposure, preferably through equity mutual funds, including ELSS tax-saving funds.
Conclusion
The Public Provident Fund is a reliable and tax-efficient savings option, offering a unique blend of security and returns. Understanding PPF rules and benefits is essential for individuals looking to build a stable financial future. Whether it’s the flexibility of deposits, tax implications, or the potential for premature closure, navigating the PPF landscape empowers investors to make informed decisions aligned with their financial goals.
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