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Layman Guide to PPF Laws and Rules

layman-guide-to-ppf-laws-and-rules

The Public Provident Fund or PPF is one of the most popular small savings schemes among risk-averse investors in India. The benefits of PPF are countless and offer a very secure long term investment option including benefits under the income tax laws. However, there are many confusion and questions among the people about the PPF investment rules.

This article presents the PPF laws and rules in a simple and layman approach so that the confusion and questions among the investors get cleared.


    Introduction

    Public Provident Fund (PPF) is an investment scheme introduced by the National Saving Organisation under the Public Provident Fund Act 1968 to promote small savings and investments. The objective to introduce the PPF scheme is to mobilize small savings in the form of investment from the citizens. It is also called a tax-savings investment instrument that enables one to build a retirement corpus as well as provides savings on taxes.

    Originally, the PPF was introduced under the Public Provident Fund Act, 1968 and Public Provident Fund Scheme, 1968 was notified thereunder. The Act of 1968 was repealed in 2018 and incorporated the PPF in an Act of 1873 called Government Savings Banks Act, 1873. For an investor, it is only shifting of the provisions of one law into another keeping all the benefits and features intact.

    Apart from the Act, the central government also makes rules under the PPF Act (now Government Savings Banks Act, 1873) which is called the Public Provident Fund Scheme.

    Recently, the Government has introduced the Public Provident Fund Scheme, 2019 which replaces all the prior rules. 

    Rules are made for operating the law hence the PPF Scheme or Rules provide how the provisions of the Act are implemented.

    Relevant Legislation governing PPF

    1. The Government Savings Banks Act, 1873 now titled as the Government Savings Promotion Act, 1873.
    2. The Government Savings Promotion General Rules, 2018 and,
    3. The Public Provident Fund Scheme, 2019. It came into effect from 12th December 2019 and overrides all the earlier rules notified so far prior to December 12, 2019.

    Key benefits of PPF Account

    PPF is a secured avenue of investment as it is backed by the sovereign guarantee of the Government of India. 

    It is tax-effective as the investment qualifies for the income tax deduction, the interest income earned on PPF account is tax-exempt and the withdrawal from the PPF account is also tax-free. 

    It provides a long term investment scope for a risk-averse investor. 

    Further, the PPF account is not liable to attachment under any order or decree of any court in respect of any debt or liability incurred by the account holder


    Who can Open PPF Account

    Only an individual who is a -
    • major (above 18 years of age) and a person of sound mind,
    • resident citizen of India
    can open a PPF account in India under the scheme.

    A PPF account is opened in Form-1 and the initial amount of deposit is minimum Rs. 500.

    A Hindu Undivided Family or HUF cannot open a PPF account.


    Limit of number of PPF Accounts

    An individual can open only one PPF account. He can open another PPF account only after the maturity and closure of the existing PPF account.

    If an individual opens another PPF account then the second account will be considered irregular and the same will be closed and the amount deposited will be returned to the depositor without any interest.


    Joint Account in the PPF Scheme

    Under the PPF scheme, no joint account can be opened. However, the nominee facility is available.

    PPF Account for minor

    An individual may open one account on behalf of each minor child. Such a minor account can be opened only by any of the parents of the minor child.

    For example, the family of Mr. Rakesh consists of himself, his wife and one minor child. Then PPF account can be opened as follows-


    Composition of account holders in the family
    No. of accounts
    By Mr. Rakesh himself in his own name
    1 (one) account
    By Mrs. Rakesh in her own name
    1 (one) account
    By Minor Child 1 + Mr. Rakesh ( or Mrs. Rakesh)
    1 (one) account
    Total Number of accounts in the family
    3 (Three)

    The minor child can open an account only with father, Mr. Rakesh, or mother (Mrs. Rakesh) but cannot with both. In other words, both the parents cannot open a sperate public provident fund account for the same minor child.

    In the absence of the parents of the minor child, his guardian, say, grandparents, can open a PPF account on behalf of the minor.

    PPF Account for a person of unsound mind

    The rule for opening a PPF account for a person of unsound mind is the same as those for a minor child.

    An individual may open one account on behalf of a person of unsound mind. Such an account can be opened only by any of the guardians.

    Amount of Contribution

    The minimum amount of deposit in the PPF account in a financial year is Rs. 500.

    The maximum amount of deposit in the PPF account in a financial year is Rs. 1,50,000. 

    This maximum amount of Rs. 1,50,000 is inclusive of the amount of contribution in the individual's own account and in the account of the minor child opened with the individual.

    For example, if in the above-given family members, if the minor account is opened with Mr. Rakesh then Mr. Rakesh cam invest a maximum amount of Rs. 1,50,000 in Mr. Rakesh's own account and in the minor account.

    This condition does not apply in a case where the account is opened on behalf of a person of unsound mind.

    Any deposit in a PPF account shall be made in multiples of Rs. 50.

    Any amount deposited in excess of Rs. 1,50,000 will not earn any interest. The rule is not clear whether the interest will be foregone for that year or forever.

    Active and Dormant PPF account

    Once a PPF account is opened, it is mandatory to contribute a minimum of Rs. 500 in every financial year to keep the account active.

    If in any financial year(s), a minimum contribution of Rs. 500 is not made then such an account will be marked as 'Discontinued' or dormant account. 

    A discontinued account shall continue to earn the same rate of interest on its outstanding balance as an active account will earn.

    However, the account holder of a discontinued PPF account cannot open another PPF account before the closure of such a discontinued account after maturity.

    Further, the account holder of a discontinued PPF account is not allowed to make a partial withdrawal or take a loan from such a discontinued account.

    Reactivation or revival of Discontinued PPF account

    A discontinued PPF account can be revived during its maturity period on payment of a fee of Rs. 50 along with arrears of minimum deposit of Rs. 500 for each year of default.

    For example, if a contribution is not made for 2 (two) years, then the account holder has to pay Rs. 1,050 (minimum contribution for 2 years i.e. Rs. 500 x 2 = 1,000 and penalty of Rs. 50) to reactivate the discontinued PPF account.

    Interest on PPF account

    Interest on a PPF account will be credited at the end of each financial year i.e. on 31st March of every year even if the account is transferred during the year

    Hence, the rate of interest on PPF account is a 'compounded annually' rate of interest.

    The present rate of interest is 7.9 percent per annum. The rate of interest is announced quarterly.

    The interest is calculated on the outstanding balance of every calendar month. The lowest balance at the credit of an account between the close of the fifth day and the end of the month is taken as the outstanding balance for that month.

    For example, if the balance as of 5th November is Rs. 10,000. On 10th November, a contribution of Rs. 5,000 is deposited into the PPF account. Interest will be computed on Rs. 10,000 for the month of November.

    Assuming there are no further transactions in December, the outstanding monthly balance for computing interest for the month of December will be taken as Rs. 15,000.

    In this case, Rs. 5,000 will not earn any interest for the month of November.

    If the contribution is deposited on 4th November, instead of 10th November, then the outstanding monthly balance for computing interest for the month of November will be taken as Rs. 15,000 and not Rs. 10,000.

    In this case, Rs. 5,000 will earn interest for the month of November.

    Assuming that the amount is contributed to PPF from the depositor's savings account, where interest is given on a daily balance basis, one can earn a maximum amount of interest on depositing the contribution on the 5th of a month.

    The depositor will earn interest up to 4th day in the savings account and also he will earn interest for the whole month in the PPF account.

    It must be remembered that deposit in a PPF account will be counted from the date when the amount is credited in the PPF account.

    For example, if a depositor deposits a cheque into his PPF account on the 4th of a month, but the cheque is cleared and credited into the PPF account on the 6th day, he will lose interest in the PPF account for that month. 

    Loan against PPF Account

    A depositor of a PPF account can avail of a loan against his PPF account balance. There are certain rules regarding the amount that can be obtained as a loan against the PPF balance.

    These rules are given below-

    1. One can avail loan against his PPF account after one year from the end of the financial year in which the PPF account was opened.

    For example, if a PPF account was opened on 10th November 2010 then the depositor will be eligible to avail loan from April 1, 2012.

    Calculation of period: The financial year for 10.11.2010 ends on 31.03.2011. The waiting period of one year ends on 31.03.2012. Hence, eligibility for availing loan begins from after the expiry period of 31.03.2012 i.e. 01.04.2012.

    2. One can avail loan against the PPF account till the end of five years from the end of the financial year in which the PPF account was opened.

    For example, if a PPF account was opened on 10th November 2010 then the depositor will be eligible to avail loan from April 1, 2012. He will remain eligible to avail loan till 31.03.2016.

    Calculation of period: The financial year for 10.11.2010 ends on 31.03.2011. The maximum eligibility period for the loan is five years. If we add '5' with 2011, we will get the required date that ends on 31.03.2016. Hence, eligibility for availing loan begins from 01.04.2012 and shall continue till 31.03.2016.

    From 01.04.2016, the depositor will not be able to obtain any loan against his PPF account. 

    From this date, the PPF account holder will be eligible to make partial withdrawals from his PPF account.

    Application for a loan shall be made in Form 2.

    Maximum Amount of Loan

    3. The maximum amount of loan that can be obtained is 25 percent of the PPF account balance at the end of the second year immediately preceding the financial year in which loan is applied for by the PPF account holder.

    In the above example, if the loan is applied for by the PPF account holder on June 10, 2015, then 25 percent of the outstanding balance in the PPF account as on 31.03.2014 will be given as a loan. 

    Calculation of period: The financial year for 10.06.2015 ends on 31.03.2016. If we reduce '2' with 2016, we will get the required date that ends on 31.03.2014. Hence, the outstanding balance as on 31.03.2014 (including interest credited to PPF account till 31.03.2014) will be considered for loan eligibility and the maximum amount of loan is limited to 25 percent of the balance as on 31.03.2014.

    Different period for considering the balance for the different period of loan application is given below-

    Period of Loan application
    Maximum Amount of Loan at 25 percent of Balance as on
    From 01.04.2012 to 31.03.2013
    31.03.2011
    From 01.04.2013 to 31.03.2014
    31.03.2012
    From 01.04.2014 to 31.03.2015
    31.03.2013
    From 01.04.2015 to 31.03.2016
    31.03.2014

    Loan against discontinued PPF account

    4. Remember, as stated earlier, the account holder of a discontinued PPF account is not allowed to take a loan from such a discontinued account. The discontinued account needs to be revived before applying for a loan from the PPF account.

    Loan against PPF account of a minor or a person of unsound mind

    5. In case of an account opened on behalf of a minor or a person of unsound mind, the guardian may apply for the loan for the benefit of the minor or the person of unsound mind by submitting a certificate to the effect that the amount sought to be withdrawn is required for the use and welfare of the minor child or a person of unsound mind.

    6. An account holder shall not be entitled to get a fresh loan so long as earlier loan has not been repaid in full together with interest thereon.

    There cannot be two simultaneous loans against the same PPF account at any time.

    Further, an account holder shall be entitled to only one loan in a financial year.

    In the same financial year, two loans will not be granted even if the previous loan, which is taken in the same financial year, is repaid in full with interest.

    Repayment of Loan

    There is a unique feature for repayment of the loan compared to normal bank loans.

    In case a loan is taken against the PPF account, then the principal is repaid first in full and after the repayment of the principal, interest is paid.

    Normally in a bank loan, both the principal and interest are paid simultaneously in the form of EMI.

    The principal amount of a loan shall be repaid by the account holder within 36 months which begins from the next month of the loan.

    The amount of repayment of the principal amount may be made either in lumpsum or in installments.

    Interest on Loan

    After the principal amount of the loan is fully repaid, the account holder shall pay interest thereon in a maximum of two monthly installments.

    If the interest is paid in two monthly installments then the rate of interest shall be 1 (one) percent more than the PPF interest rate and is computed on the monthly outstanding balance.

    The present PPF interest rate is 7.9 percent hence the interest on loan against PPF account shall be 8.9 percent.

    In earlier rules, the spread was 2 percent which is now reduced to 1 percent.

    If the principal is not repaid within 36 months, the applicable interest rate will increase to 6 percent above the PPF interest rate (13.9 percent as per the current PPF interest rate). 

    The interest, in such cases, will be debited from the PPF account at the end of every financial year.

    If the principal amount is repaid within 36 months of taking the loan but the interest is not paid, then the interest amount shall be debited from the PPF account after the end of 36 months.

    Remember, the PPF account and the loan account are different for the purpose of crediting the interest and payment of interest. The PPF account will continue to earn interest on the outstanding balance and interest is separately payable for the loan account.

    For example, if the outstanding balance in the PPF account is Rs. 10 lakh and a loan of Rs. 4 lakh is taken against the PPF account, the PPF account will continue to earn interest on Rs. 10 lakh and interest is payable separately on Rs. 4 lakh.

    Partial Withdrawal from PPF account

    Although a PPF account is considered as a long term savings instrument, however, the PPF scheme allows partial withdrawal from the PPF account.

    The rules for partial withdrawal from a PPF account are given below-

    1. One can make a partial withdrawal against his PPF account after five years from the end of the financial year in which the PPF account was opened.

    For example, if a PPF account was opened on 10th November 2010 then the depositor will be eligible to make a partial withdrawal from April 1, 2016.

    Calculation of period: The financial year for 10.11.2010 ends on 31.03.2011. The waiting period of 5 years ends on 31.03.2016. Hence, eligibility for making a partial withdrawal begins after the expiry period of 31.03.2016 i.e. 01.04.2016.

    Maximum Amount of partial withdrawal

    2. The maximum amount that can be withdrawn partially is 50 percent of the PPF account balance at the end of the fourth year immediately preceding the financial year or the preceding the financial year, whichever is lower, in which partial withdrawal is applied for by the PPF account holder.

    In other words, the total amount eligible for partial withdrawal in a particular financial year is the lower of:
    1. 50 percent of the PPF account balance at the end of the fourth financial year, prior to the current year of application.
    2. 50 percent of the PPF account balance at the end of the financial year prior to the current year of application.

    In the above example, if the withdrawal is applied for by the PPF account holder on June 10, 2019, then the eligible amount of partial withdrawal shall be determined as follows and is lower of - 
    1. 50 percent of the outstanding balance in the PPF account as on 31.03.2016 
    2. 50 percent of the outstanding balance in the PPF account as on 31.03.2019

    Calculation of period: The financial year for 10.06.2019 ends on 31.03.2020. If we reduce '4' with 2020, we will get the required date that ends on 31.03.2016. Hence, the outstanding balance as on 31.03.2016 (including interest credited to PPF account till 31.03.2016) will be considered for the eligible amount of partial withdrawal.

    For the next date, we will reduce '1' with 2020, we will get the required date that ends on 31.03.2019. Hence, the outstanding balance as on 31.03.2019 (including interest credited to PPF account till 31.03.2019) will be considered for the eligible amount of partial withdrawal.

    3. Where any amount of loan outstanding along with interest then the same shall be paid by the account holder before availing the facility of partial withdrawal.

    4. The facility of partial withdrawal can be availed only once in a financial year.

    Partial Withdrawal from a PPF account of a minor or a person of unsound mind

    5. In case of an account opened on behalf of a minor or a person of unsound mind, the guardian may apply for the withdrawal for the benefit of the minor or the person of unsound mind by submitting a certificate to the effect that the amount sought to be withdrawn is required for the use and welfare of the minor child or a person of unsound mind.

    6. No partial withdrawal is allowed from a discontinued account unless the same is revived.

    Closure of account on maturity

    1. A PPF account shall mature after the expiry of 15 years from the end of the financial year in which the account was opened.

    For example. if a PPF account is opened on 30.03.2000, then the account shall mature on 01.04.2015.

    However, if a PPF account is opened on 02.04.2000, then the account shall mature on 01.04.2016.

    Remember, a PPF account always matures on 1st April.

    Closure of account on maturity

    On maturity, the account-holder may close the PPF account by submitting Form-3 and withdraw the entire outstanding amount.

    Continuation of PPF account without deposits after maturity

    1. The new PPF Scheme, 2019 has given an option to the account holder to continue the account for any period after maturity without any further contribution. Such an account shall earn the same rate of interest as applicable to a normal PPF account.

    2. One may withdraw any amount from the continued PPF account once in a financial year. There is no limit on the minimum or maximum amount of withdrawal. The only condition is that only one withdrawal is allowed in a financial year.

    3. Once the account is continued without deposits for more than a year, the account holder shall not have the option again to continue the account with deposits.

    Extension of PPF account with deposits after maturity

    After maturity, the account holder may extend his account and continue to make a deposit for a further block period of 5 (five) years in Form-4.

    The option to extend the PPF account for a period of five years shall be exercised before one year of maturity. 

    If no such option is exercised within the prescribed time limit then no deposit can be made in the PPF account after maturity. If any contribution is deposited in the PPF account after the maturity, then such a deposit shall be treated as an irregular deposit and shall be refunded to the depositor without any interest.

    Under this option, the account becomes a normal PPF account and the account holder has to maintain the minimum deposit criteria for the 5 years whereas, in the previous option, no deposit or annual contribution is mandatory. The partial withdrawal rule as stated above shall apply to such an account accordingly.

    In a case where an account is opened on behalf of a minor or a person of unsound mind, the account may be extended at the request of the guardian.

    After the expiry of the extended five years, the PPF account holder may -
    • again extend the same for a further block of five years with deposits or 
    • may continue the account without deposits or 
    • may close the account and withdraw the amount
    as per rules as stated above.

    Premature closure of PPF account

    The new PPF Scheme, 2019 allows premature closure of a PPF account before completion of 15 years under certain emergency circumstances. 

    However, a premature closure comes with a penalty of 1 percent interest rate.

    An account holder is allowed premature closure of his account or the account of a minor or person of unsound mind of whom is the guardian and such an application is required to be made in Form-5.

    Premature closure of a PPF account is allowed in the following three circumstances-

    (i) treatment of life-threatening disease of the account holder, his spouse or dependent children or parents, on the production of supporting documents; or

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

    (iii) on change in residency status of the account holder on production of a copy of Passport and visa or Income tax return.

    On Death of the account holder

    1. On the death of the PPF account holder, the PPF account shall be closed.

    2. The nominee or the legal heir cannot continue the account.

    3. The outstanding balance in the PPF account of the deceased account holder will be paid to the nominee or the legal heir.

    Protection of credit balance from attachment

    The amount standing to the credit of any PPF account holder 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.

    Applicability of Government Savings Promotion General Rules, 2018

    The PPF Scheme, 2019 provides that where no specific rule is made in this scheme then the provisions of Government Savings Promotion General Rules, 2018 shall apply to this scheme.


    Income Tax Benefits on a PPF account

    The income tax benefits or incentives on a PPF account is not a part of the PPF Scheme, 2019.

    The tax benefits are provided in the Income Tax Act, 1961.

    A PPF account falls under Exempt-Exempt-Exempt (EEE) category. This means the contribution to a PPF account is exempt from tax, the interest income on a PPF account is exempt from tax and the withdrawal from a PPF account is also exempt from tax.

    Tax deduction on Contribution to a PPF account

    Contributions in a Public Provident Fund (PPF) account are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. The maximum amount of deduction that can be claimed under section 80C is Rs. 1,50,000. One can invest the entire limit of Rs. 1,50,000 in a PPF account and can claim a deduction of Rs. 1,50,000 from total income to reduce his tax liability.

    Contributions up to an overall limit of Rs. 1,50,000 into a PPF account of the following persons can be claimed as income-tax deduction from taxpayer's total income- 

    • Taxpayer's self PPF account
    • PPF account of the taxpayer's spouse
    • any child of the taxpayer

    Tax exemption on interest income on a PPF account

    The annual interest income earned on a PPF account is exempt from income tax under section 10(11) of the Income Tax Act, 1961. It means the interest income will not be included in computing the total income of the individual. The entire amount of interest income from a PPF account is tax-free.

    Since the PPF interest income is tax-free, no tax is payable on the PPF interest income. Therefore, the present PPF rate of interest of 7.9 percent is the after-tax rate of tax.

    On the contrary, the interest income from Fixed Deposits are not tax-free but are taxable. Hence, the rate of interest quoted for Fixed Deposits is a pre-tax rate of interest.

    Suppose, the rate of interest on a Fixed Deposit is quoted as 8% compounded quarterly. It translates the coupon rate of interest to 8.24% per annum.

    If a taxpayer compares the FD rate of interest of 8.24 percent with the PPF rate of interest of 7.9 percent, he is wrong. For an individual, who does not fall under any tax bracket, the comparison is correct but not for a person who falls in any tax bracket.

    Even for an individual who falls in a 5 percent tax bracket, the after-tax rate of interest on FD comes to 7.8 percent which is far below the after-tax rate of interest of 7.9 percent on a PPF account.

    For an Individual who pays tax @ 30 percent, the comparable FD interest rate falls to 5.8 percent.

    In computing the tax effect, the surcharge and health and education cess ignored for the sake of simplicity.

    How PPF interest rate does better than Fixed Deposit interest rate at different tax rates-

    Rate of Tax
    5%
    20%
    30%
    After-tax rate of tax on Fixed Deposit
    ( 8% coupon rate) (in %)
    7.8
    6.6
    5.8
    After-tax rate of tax on PPF (in %)
    7.9
    7.9
    7.9

    It may be remembered that interest income from a PPF account is exempt income and needs to be reported in Income Tax Return or ITR in the Schedule-Exempt Income.

    In ITR-1, the manner in which the exempt PPF interest needs to be reported is shown below-

    In the 'Computation of Income and Tax Tab'. enter the PPF interest under the heading 'Exempt Income: For reporting purposes'.


    layman-guide-to-ppf-laws-and-rules

    No TDS on PPF interest

    Since the interest income is exempt from income tax, there is no TDS on PPF interest irrespective of quantum of interest income on a PPF account in a financial year.

    Tax exemption on withdrawal from a PPF account

    There is no provision in the income tax Act which provides charging of income tax on the withdrawal from a PPF account. The withdrawal may be partial withdrawal or final withdrawal upon the maturity of the PPF account.

    Hence, withdrawal from a PPF account is also free from income-tax.

    Appendix-1: Different Forms notified under the PPF Scheme, 2019 and their purposes

    Form No.
    Purpose
    Form-1
    Application for Opening a Public Provident Fund (PPF) Account
    Form-2
    Application for Loan/Withdrawal from PPF Account
    Form-3
    Application for Closure of PPF Account
    Form-4
    Application for Extension of PPF Account
    Form-5
    Application for Premature Closure of PPF Account

    Appendix-2: Historic rate of interest on PPF scheme since 1968

    Year
    Rate of interest (p.a.)
    1968
    4.8%
    1969-70
    4.8%
    1970-71
    5.0%
    1971-72
    5.0%
    1972-73
    5.0%
    1973-74
    5.3%
    From 1.4.1974 to 31.7.1974
    5.8%
    From 1.8.1974 to 31.3. 1975
    7.0%
    1975-76
    7.0%
    1976-77
    7.0%
    1977-78
    7.5%
    1978-79
    7.5%
    1979-80
    7.5%
    1980-81
    8.0%
    1981-82
    8.5%
    1982-83
    8.5%
    1983-84
    9.0%
    1984-85
    9.5%
    1985-86
    10.0%
    From 1.4.1986 to 31.3.1999
    12.0%
    From 1.4.1999 to 14.1.2000
    12.0%
    From 15.1.2000 to 28.2.2001
    11.0%
    From 1.3.2001 to 28.2.2002
    9.5%
    From 1.3.2002 to 28.2.2003
    9.0%
    From 1.3.2003 to 30.11.2011
    8.0%
    From 1.12.2011 to 31.3.12
    8.6%
    From 1.04.2012 to 31.3.2013
    8.8%
    From 1.04.2013 to 31.03.2016
    8.7%
    From 1.04.2016 to 30.09.2016
    8.1%
    From  1.10.2016 to 31.03.2017
    8.0%
    From 01.04.2017 to 30.06.2017
    7.9%
    From  01.07.2017 to 31.12.2017
    7.8%
    From  01.01.2018 to 30.09.2018
    7.6%
    From  01.10.2018 to 30.06.2019
    8.0%
    From  01.07.2019 to 31.03.2020
    7.9%

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