How does a PPF Work?

5 mins read
by Angel One

What is a personal pension fund (PPF) account?

The Public Provident Fund (PPF) scheme is a long-term investment vehicle that pays an acceptable interest rate and yields on the principal invested. Interest and dividends are not taxable under the Income Tax Act. Under this programme, one must open a PPF account, and the amount deposited during the year is tax-deductible under section 80C.

PPF has been one of the most commonly used traditional investment vehicles in India, and is particularly famous among the working class and organized sector. A lot of people have the question “how does PPF work”.

How to begin the process of opening a PPF account

A PPF account may be opened at a Post Office or a nationalised bank like SBI or PNB. Even certain private banks, including ICICI, HDFC, and Axis Bank, are now authorised to provide this service. You must submit the complete application form and the appropriate documents, including proof of identity, address, and signature. After submitting these documents, you may make a required deposit toward the account’s opening.

What is the rate of interest on PPF?

The current annual compound interest rate is 7.1% per annum (for Q2 FY2021; unchanged from the prior quarter). Each year, the Finance Ministry establishes the interest rate, which is paid on March 31st. The interest rate is calculated on the lowest balance between the closing of each month’s fifth and final day.

PPF possesses four critical characteristics

How PPF works is that PPF requires a minimum tenure of 15 years which is extendable in 5-year chunks.

Investment Limits:

Each financial year, PPF allows for a minimum investment of Rs 500 and a maximum investment of Rs 1.5 lakh. Investments may be made in whole or in up to 12 equal payments.

The account can be started with as little as Rs 100. Annual investments beyond Rs 1.5 lakh do not earn interest and are not tax-deductible.

Deposit Frequency:

For 15 years, deposits into a PPF account must be made at least once a year.

Deposits into a PPF account can be made in cash, check, demand draught, or online fund transfer.


A PPF account holder may nominate a candidate for their account at the time of account opening or any point after that.

Joint accounts:

A PPF account can be opened in a single person’s name, and it is not permitted to open an account in joint names.

Risk factor:

Because PPF is government-backed, it provides guaranteed, risk-free returns and total capital protection. The risk associated with keeping a PPF account is negligible.

Who can invest in a PPF?

PPFs are open to all Indian citizens. A citizen may only have one PPF account unless it is in the name of a minor. Non-resident Indians and HUFs are ineligible to open PPF accounts.

Loan secured by a PPF

Between the third and fifth years, you can borrow against your PPF account. The loan amount cannot exceed 25% of the second year immediately before the year of application. A second loan may be obtained before the sixth year if the previous loan is entirely repaid.

Withdrawal of PPF

Generally, one can withdraw the full balance of a PPF account only upon maturity, which occurs after 15 years. Post that, an account holder’s entire balance in the PPF account, including earned interest, may be withdrawn freely and the account closed.

However, if account holders require cash and choose to withdraw before 15 years, the system allows for partial withdrawals beginning in year seven or after completing six years.

Premature withdrawals are allowed up to a maximum of 50% of the account balance after the fourth year. Additionally, withdrawals are permitted just once every fiscal year.

Withdrawal from PPF Procedure

If you intend to withdraw a portion or all of the money in your PPF account.

Step 1: Complete the application form (Form C) with all necessary details.

Step 2: Submit your application to the bank branch where your PPF account is located. This form can be downloaded here.

How does Form C appear?

This form is divided into three sections:

Section 1 is the declaration section, in which you must submit your PPF account number and the amount you wish to withdraw. Additionally, you must state how many years have passed since the account was first opened.

Section 2 Office use section, which includes the following information:

  • The date when the PPF account was started.
  • The total balance in the PPF account.
  • Date of approval of the previously requested withdrawal.
  • The total amount of withdrawals available in the account.
  • The sum of money that has been sanctioned for withdrawal.
  • Date and signature of the individual responsible – typically the service manager.

Section 3 requests information about the bank to which funds are to be deposited directly or whose favour the cheque or demand draught is to be issued. Additionally, a copy of the PPF passbook must be enclosed with this application.

What are the tax advantages of PPF investing?

PPFs are one type of investment vehicle that is classified as Exempt-Exempt-Exempt (EEE). This means that all PPF contributions are tax-deductible under Section 80C of the Income Tax Act. Additionally, the accrued principal and interest are tax-free at the time of withdrawal. It is critical to remember that a PPF account cannot be withdrawn before maturity. However, A PPF account can be transferred from one designation point to another. However, keep in mind that a PPF account cannot be prematurely closed. Only in the event of the account holder’s death may the nominee request the account be closed.

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