A PPF or Public Provident Fund is a tax-free deposit scheme provided by the Indian government, with interest on the fund is fixed for each quarter and compensated by the government. For the second quarter of the year, 2020-21, i.e. from 1 July to 30 September 2020, the effective PPF interest rate is set at 7.1%. The interest rate was 7.1 per cent for April to June 2020. No changes have been made to interest rates in small savings schemes.
The PPF rate is one of the highest in the Fixed Income space. PPF interest is determined monthly on the lowest balance between the closing of the fifth day and the last day of each month, i.e. for interest estimation purposes. However, only attention is given to the amount that is deposited into the account before 5th day of the month. But apart from this, let's jump into some important facts that you must have to know about PPF.
1. The interest rate provided on the PPF is not set but is related to the yield of government bonds for 10 years. The rate does not alter on a regular basis but is set at the outset of a quarter based on the average bond yield for the preceding 3 months.
2. PPf comes with a maturity period of 15 years and after the maturity period you can either extend it for five years (with or without making further contributions), withdraw the entire amount or choose for an exit.
3. You must submit an application to the Post Office or bank before the end of one year of maturity if you wish to extend the account and also contribute. In result the account will be further extended for 5 years.
4. Your account will be automatically extended and not accept contributions in case you do not inform the bank or Post Office for your extension. The balance keeps receiving the standard interest and in a fiscal year you can only make withdrawals.
5. A tenure of 15 years doesn't mean that the capital has been locked up for the entire term. The 15-year period is from the day the account is opened. For eg, if the PPF account was opened on 1 January 2010, it would mature on 31 March 2025, that is to say 15 years from 31 March 2010. At maturity, you can indefinitely extend the PPF account in 5 year blocks at a time.
6. Only one partial withdrawal is permitted per fiscal year and the maximum that can be withdrawn per withdrawn is 50% of the account balance as at the end of the fiscal year preceding the existing year or at the end of the 6th fiscal year, preceding the existing year.
7. The provision to take advantage of loan against the PPF account is valid from the 3rd financial year up to the 6th financial year from the account opening date. In another term, at any point after the expiry of one year from the end of the fiscal year in which the account was started but before the expiry of five years from the end of the fiscal year in which the account was established, the loan may be used, the loan can be availed up to 25% of the balance. It costs 1 percent per annum and must be reimbursed within three years. When a loan is repaid an investor would not be allowed to take out additional loans in case of emergency.
8. You can make a minimum contribution of Rs.500 up to Rs.1.5 lakh per annum in your PPF account. Also, for accounts extended over 15 years, the minimum investment of Rs 500 must be maintained. Your account becomes inactive and you need to pay a penalty of Rs.50 to reactivate your account in case you fail to make the minimum contribution per year. In case you make the contribution more than Rs 1.5 lakh in a year then no interest will be earned on the excess amount, even if credited by accident. The maximum limit of Rs 1.5 lakh per year facilitates the contribution make on behalf of a minor in the PPF account and hence will give you additional tax benefits.
9. The interest is compounded yearly but calculated every month in PF. The interest is on each month's lowest balance between the fifth and last day. In case you invested before the fifth, the contribution will also earn applicable interest for that month. If you are making contribution through cheque make sure that you deposit it at least 3-4 days prior to the cut-off date.
10. Contributions are liable for tax deduction under Section 80C, within the limit of Rs.1.5 lakh. Earned interest is not taxable, but must be recorded by an individual in his / her tax return. Corpus withdrawn on maturity is tax-free and have no effect on the individual's tax liability.