Public Provident fund or simply PPF is a scheme introduced by the Government of India in 1968 under which any citizen of India can make a contribution to the scheme by which he/she can claim a income tax rebate under appropriate Income tax laws.
Only Individuals are eligible to invest in the public provident fund. If the individual is a minor, an individual corresponding to the minor can make a contribution to the scheme.
The duration of the scheme is of 15 years but can be extended for 1 or more terms of 5 years. The PPF account can be terminated at any time but further contributions to the scheme later can only be made once 15 year term is over.
Investment amounts & Interest rates
A minimum amount of Rs.500 should be made per annum and any further amount can be made in multiples of Rs.5 subject to a maximum of
Rs.70000 Rs.100000 per year. Also, one can only contribute 12 times in a year (it need not be once per month).
The interest rate for your PPF account is calculated on every 31st of March at 8% (see Note below). This interest rate is calculated based on the minimum amount that exists in your account between 5th of March and 31st of March.
So one should not withdraw any part of the PPF amount between March 5th and 31st if the Interest rate is to be fully utilized.
In other words, for maximum benefit, one should contribute before 5th of every month. If you can contribute Rs.1 lakh a year, its best to contribute that amount between 1st and 5th April.
Note: Government of India decides the interest rate every year. Mostly, it is some value between 8 and 9%.
Tax benefits and Loan Facility
BothPrincipal and interest accrued from PPF is completely exempted from the Income Tax under section 88 of IT Act.
And any amount that is to be credited is also fully exempted from wealth tax.
Loans of up to 25% of the balance at the end of 1st financial year from 3rd to 6th year can be taken. Next loan can be taken once the first loan is completely paid off.
Withdrawal of PPF amount is not possible for the first 5 years. From the 6th year you can withdraw amount from your account but that can be made only once in a financial year.
If the account is extended beyond 15 years, up to 60% of the balance at the start of the extended period can be withdrawn.
PPF account can be opened at Post Offices, Public and Private sector banks (not all branches of a bank offer PPF, though).