PPF is one of the most coveted products for salaried and professionals alike when it comes to tax savings and for some even investing. Surely, investors would have heard about this term but only a few would know about this in detail.
Therefore, in this series, we present to you all you need to know about PPF (Public Provident Fund). Not just this, a calculator to compute the returns based on the investments we make is also readily available for our investors. This will help us plan well ahead of the future.
Public Provident Fund – At a Glance
|PPF Tenure||Minimum 15 years to maximum 50 years|
|Joint Account/ Multiple Accounts||Not allowed|
|Deposit Frequency||Monthly, Quarterly, Half-yearly, Yearly (Maximum 12 deposits in a year)|
|Items Included||Maturity amount, interest earned, total investment, maximum loan availability, maximum withdrawal availability|
|Loan Availability||After 3rd year of completion till 6th year of PPF|
|Withdrawal Availability||Beginning of 7th year|
|Minimum Investment (Yearly)||INR 500|
|Maximum amount available for deposit (Yearly)||INR 1.5 lakhs|
|Current Interest Rate offered||8% p.a. (Changed on a quarterly basis by the government)|
|Interest Rate methodology||Compounded annually|
|Availability of Tax Benefits||Yes (Under section 80C of Income Tax Act, 1961)|
|Taxability on interest earned||Interest earned is non-taxable (Amount at maturity is also non-taxable)|
What Is a PPF Calculator?
The PPF return calculator presented here is a very user friendly and handy tool that helps us perform all the complicated calculations with absolute ease.
This breaks down our earnings (interest) year wise that we would earn by contributing to our PPF account. This will also not require investors to use the PPF calculators provided by various banks that offer PPF accounts such as SBI, HDFC Bank, PNB etc.
How Do Will You Use a PPF Calculator?
In order for the PPF calculator to provide all the calculations correctly, we need to feed in all the necessary information as provided below:-
- Tenure of our PPF account: The tenure of the PPF account can range from minimum of 15 years to maximum of 50 years with comes with an option of extension in blocks of five years.
- Deposit/ Payment Frequency: The payment frequency can be chosen as monthly, quarterly, half-yearly and annually. This depends on our choice and ease of cash flows that we receive.
- Amount deposited: We also need to feed in the amount of deposit that we intent to invest in the PPF account. Say for example, we are choosing a monthly deposit system and depositing INR 12,500 per month that sums up to INR 1.5 lakhs in a financial year.
- Interest Rate: One of the most critical factors that decide our returns is the interest rates. The interest rate is the rate of return that we expect out of our PPF account. We will explain how this gets determined later in this article.
Once all these inputs have been filled, we need to click on the calculate button. The following information displays on the screen:
- Maturity amount of our PPF account;
- Interest earned on our PPF account;
- Total investment made to our PPF account;
- Loans and withdrawal possible during different periods of PPF investment horizon;
- Closing balance
How can we interpret the results of the Online PPF calculator?
Once we have all the information that is displayed on the screen, we should be able to understand what each of the elements mean.
- Opening Balance: The opening balance reflects the PPF account balance as at the beginning of the year;
- Amount Deposited: The sum of all the account balances made during the year is termed as amount deposited;
- Interest Earned: Interest component is calculated based on the account balance at the end of the year. Investors should note that the balance on the PPF account is calculated on a compounded basis.
- Closing Balance: The closing balance is the sum of the opening balance of the year and the interest earned during the entire year.
- Maximum Loan Availability: Loan on the PPF account can be availed only after the completion of 3rd The loan can be availed till the end of the 6th year i.e. calculated from the date of opening of the account. The maximum loan that can be availed is equal to 25 percent of the opening balance of the PPF account for the previous year. For example, if we apply for a PPF account in March of 2019, the qualifying amount will be calculated based on the closing balance in March 2018. The interest charged on the loan is more than 2 percent of the interest earned on the scheme. The principal repaid is credited to the subscriber’s account whereas the interest paid on the loan is accrued to the government. Form D needs to be filled for loan availability.
However, the point to note here is that after the completion of 6th year, no loan can be opted from our PPF account. Post this period, only partial withdrawals can be made.
Partial withdrawal is allowed from a PPF account from the beginning of 7th The maximum amount that can be withdrawn from the PPF account is lower of the following:-
- Option 1: 50 percent of the account balance at the end of the previous year that is calculated from the year of withdrawal;
- Option 2: 50 percent of the account balance at the end of the 4th year preceding the year in which the withdrawal was opted for.
Now that we are clear about all the components of that are exhibited in the PPF calculator, let us look at few of the other components of PPF that an investor should be aware of.
We should understand that PPF is a Government of India backed long term small savings scheme that provided tax benefits under section 80C of Income Tax Act, 1961.
As it is backed by the government, we can conclude it is an absolutely safe instrument and does not bear risks as compared to other category of investments such as equities or mutual funds. In fact, a PPF account cannot be attached by a person or entity to pay off the debt or liability.
Further, even a court decree cannot make a person pay off its debts using the proceeds of the PPF account balance.
PPF account provides fixed returns to investors at rates that are decided by the Ministry of Finance on a quarterly basis. The minimum period for investment as discussed is 15 years. The objective of starting this scheme by government is 1968 was to mobilize the small savings from every household of this country and to secure the financial future of millions of Indians from every walk of life.
Tax Benefits on PPF
As was touched upon, investments made in the PPF account are subject to tax deduction under Income Tax Act, 1961. However the maximum amount allowed for investment as well as deduction is INR 1.5 lakhs (Minimum investment in a year is INR 500).
The best way to understand the importance of income tax benefits on PPF accounts is to know the EEE concept. EEE means exempt, exempt, exempt category. Meaning in a PPF account, the principal investment made, the interest earned and the maturity amount are all completely exempt under taxation.
|Exempt||Principal Investment (Maximum 1.5 lakhs per year)|
|Exempt||Interest earned (Compounded)|
Continuity After 15 years
If we wish to continue with our PPF investments post 15 years, we need to extend the period of investment. This extension will be valid for the next five years, post which another extension can be availed.
We can extend this for as many times as we want. We need to submit a request to extend the account, with further contributions by submitting Form H. the choice of extension with contribution has to be made within one year from the date of maturity; otherwise the default choice of extension without further contribution applies.
We should also understand that interest rates on PPF are decided by the Ministry of Finance every quarter. It is calculated monthly on the lowest balance between the close of the fifth day and the last day of every month. Therefore, for the purpose of interest calculation, amount that is deposited into our account before 5th of the month is only considered. Hence it is advised that to maximize the potential returns from PPF, we should make the payments between 1st and 5th of the month.
The latest rate of interest on PPF is 8 percent. The rates for the preceding few quarters are highlighted below:-
|Time Period||PPF Interest Rate (%)|
|Q1 FY 19-20 (Current)||8.0% p.a.|
|Q4 FY 18-19||8.0% p.a.|
|Q3 FY 18-19||8.0% p.a.|
|Q2 FY 18-19||7.6% p.a.|
|Q1 FY 18-19||7.6% p.a.|
Given the potential benefits of stable and good returns, government guarantees and tax benefits, we can definitely think of investing in PPF. Not just this, those that are already invested can calculate the returns expected for future years by using the new calculator series brought through this article.