The Public Provident Fund is one of India's most familiar long-term savings schemes. Backed by the government, it offers a fixed interest rate that is reset periodically, a long lock-in, and favourable tax treatment.
This article explains how a PPF account works, how interest is actually calculated, what the lock-in means in practice, the ways to access money early, and where the scheme fits in a plan that also includes equity investing.
The basics
A PPF account can be opened at a post office or at authorised banks, and many banks allow it to be opened and operated online. An individual can hold one account in their own name; an account can also be opened on behalf of a minor by a guardian.
You deposit money each financial year, within a minimum and a maximum set by the government. Deposits can be made in a lump sum or in instalments during the year. If the minimum is not deposited in a year, the account becomes inactive and needs a small penalty plus the missed deposits to revive.
The account runs for a long fixed term — fifteen financial years under current rules — after which it can be closed or extended.
Deposit limits, the interest rate and other terms are set by the government and change from time to time, so check the current rules before relying on any figure.
How interest works
The rate is set by the government and reviewed periodically, usually each quarter. It is not fixed for the life of your account; it applies to your whole balance and changes as the announced rate changes.
Interest is calculated monthly but credited once a year, at the end of the financial year, and then compounds.
The fifth-of-the-month rule. Under current rules, the interest for each month is calculated on the lowest balance between the fifth day and the end of that month. A deposit made on the fourth earns interest for that month; the same deposit made on the sixth does not.
This makes timing matter for people who deposit once a year. A deposit made in the first days of the financial year earns interest for every month; one made at the end of the year earns almost nothing for that year. Over fifteen years, consistently depositing early can make a noticeable difference to the final amount.
For those depositing monthly, simply making each deposit before the fifth captures the same benefit.
The lock-in, and getting money out early
PPF is designed to be long-term, and its liquidity is limited.
Loans. During the early years of the account, you may take a loan against the balance, within limits and at an interest cost.
Partial withdrawals. After a specified number of years, a limited withdrawal is allowed each year, calculated from the balance at earlier dates.
Premature closure. Allowed only in specific circumstances, such as serious illness or higher education, after a minimum period, and usually with a reduction in the interest earned.
The exact years, limits and conditions are set by the rules in force and change; check them before planning on early access.
The practical lesson: money in a PPF account should be money you are comfortable not touching for a long time. It is not a substitute for an emergency fund.
At maturity: close or extend
When the term ends, you have three broad choices.
Close the account and withdraw the full balance.
Extend without new deposits. The balance continues to earn interest, and under current rules you can withdraw some or all of it, subject to conditions.
Extend with deposits. You continue contributing, in blocks of five years under current rules. This requires submitting the extension form within a specified period after maturity; missing it changes which option applies.
Many people extend because the account is a convenient, low-risk place to keep money they do not need. Others close it to fund a goal or rebalance.
Tax treatment, briefly
Under current rules, PPF has favourable treatment at all three stages: deposits can qualify for a deduction under the old tax regime, the interest earned is not taxed, and the maturity amount is not taxed.
Two caveats. First, the deduction applies only if you file under the old regime; under the new regime, the deposit itself gives no deduction, though the interest and maturity remain tax-free under current rules. Second, tax rules change, and the treatment of any scheme can be revised. Check the current position with the official sources or a tax professional.
Where PPF fits
Strengths: government backing, a known interest rate for each period, no market risk to the balance, discipline enforced by the lock-in, and favourable tax treatment under current rules.
Limitations: the rate can be revised downwards, the annual deposit ceiling limits how much can go in, liquidity is restricted, and over long periods the return has historically been lower than that of diversified equity, which carries much higher volatility.
A sensible role is as part of the stable, debt-like portion of a long-term plan. Someone with a long horizon might combine a PPF account for stability with equity index funds for growth, choosing the balance according to their age, goals and tolerance for falls.
Measure honestly. When comparing PPF with equity investments made through monthly instalments, compare annualised returns that account for the timing of each deposit, rather than total gains.
An account for the equity part of your plan
Hold index funds and shares alongside your long-term savings, with direct plans. Free to open
PPF rules, interest rates, deposit limits and tax treatment are set by the government and change from time to time; check current rules before acting. This is educational material, not advice. We run no tips group and no signal service, we manage nobody's money, and no return is promised.
Disclosure: the account-opening link on this page is under Atul Shrivastava's Zerodha Authorised Person registration (NSE AP Reg: AP2516003481; Zerodha Broking Ltd. SEBI Reg: INZ000031633) and earns a revenue share. TheFinBaba is not a SEBI-registered Investment Adviser — this content is educational, not investment advice.
Frequently Asked Questions
What is the Public Provident Fund?
A government-backed long-term savings scheme with a periodically reset interest rate, a long lock-in and favourable tax treatment under current rules.
When should I deposit in PPF to earn maximum interest?
Under current rules, monthly interest is calculated on the lowest balance between the fifth and the end of the month, so deposits made before the fifth, and early in the financial year, earn more.
Can I withdraw money from PPF before maturity?
Loans are allowed in the early years, limited partial withdrawals after a specified period, and premature closure only in specific circumstances. Check current rules for the exact conditions.
What happens when a PPF account matures?
You can close it, extend it without new deposits, or extend it with deposits in blocks under current rules, by submitting the extension form in time.
Is PPF better than equity mutual funds?
They do different jobs. PPF offers stability without market risk; diversified equity has historically offered higher long-term growth with much higher volatility. Many plans use both.
Related Reading
- Annualised returns for regular deposits
- Other small savings schemes
- An equity option for tax saving
- Money you can reach quickly
- Long goals for children
- Returns after inflation
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