PPF explained: how the Public Provident Fund works

The basics

• Who can open one: any resident individual, in their own name, at a post office or a participating bank. You can also open one for a minor as a guardian. Non-resident Indians cannot open a new account.
• One account per person: you generally cannot hold more than one PPF account in your own name.
• Tenure: 15 years. After that you can extend the account in blocks of 5 years, with or without further contributions.
• Contributions: at the time of writing, a minimum of 500 rupees and a maximum of 1.5 lakh rupees in a financial year, in a lump sum or in instalments.

How the interest works

The government sets the PPF interest rate and reviews it every quarter along with other small savings rates. The rate for the period applies to your balance, and interest is calculated monthly on the lowest balance between the 5th and the end of the month, then credited at the end of the financial year.

A practical consequence: to earn interest for a given month, deposit before the 5th of that month. Depositing on the 6th means that month's deposit earns nothing for that month.

Because the rate is floating, you do not lock in today's rate for 15 years. The rate can change either way over the life of the account. Check the current rate on the PPF page rather than relying on an old figure.

The tax advantage

PPF is often described as EEE: the contribution, the interest and the maturity amount are all exempt from tax. Contributions qualify for a deduction under Section 80C, up to the overall limit shared with other 80C investments, but only under the old tax regime. Interest and the maturity proceeds are tax-free regardless.

That tax-free status is the main reason PPF can beat a fixed deposit with a higher headline rate. FD interest is taxable, so for someone in a higher tax slab the after-tax FD return can be lower than PPF.

Access to your money

The lock-in is long, but not absolute. From the third year onwards you may borrow against the balance, subject to conditions. From the seventh financial year onwards you can make a limited partial withdrawal. Full premature closure is allowed only in specific circumstances, such as serious illness or higher education, under rules that change from time to time.

PPF versus an FD

• Safety: both are considered low-risk; PPF is government-backed, and bank FDs are covered by deposit insurance up to the limit per bank.
• Return: PPF pays a government-set floating rate and is tax-free; an FD locks a rate but interest is taxable.
• Liquidity: FDs are far easier to break; PPF is designed for long horizons.
• Best for: PPF suits long-term goals such as retirement or a child's education; FDs suit short and medium horizons.

Is it right for you?

PPF works best as a steady, low-risk core of long-term savings, not as your only investment and not for money you may need soon. Rules, limits and rates are revised by the government, so confirm current terms with the post office or bank before you invest. This is general information, not personal financial advice.