Public Provident Fund (PPF) is one of the most popular and preferred investment instruments in our country. You can open a PPF account with either a post office or bank.
One of the most popular and preferred investment instruments in our country is the Public Provident Fund (PPF). It is especially hyped because this government-backed scheme comes under the EEE (exempt-exempt-exempt) status. Everything from the amount invested along with the interest earned and proceeds received at maturity is tax exempted under the Section 80C of the Income Tax Act. No wonder, PPF is considered to be an attractive alternative than investing in debt instruments. The interest rates of PPF are reset on a quarterly basis by the government and currently, it is earning an interest rate of 8 per cent p.a.
You can open a PPF account with either a post office or bank. It can be done with a maximum deposit of Rs 1.5 lakh and a minimum deposit of Rs 500 in a financial year. You can make a contribution either as a lump-sum or as a monthly deposit not exceeding 12 times in a financial year. PPF comes with a lock-in period of 15 years. However, on its maturity, there are alternative options that you can consider to do with your PPF account.
As an investor, you have to decide how to use the money at the end of the maturity period. If you wish to reinvest it, the entire amount after maturity cannot be invested in a fresh PPF account as the maximum limit of Rs 1.5 lakh cannot be exceeded. Firstly, post-maturity you can extend the account in a block of five years. The account can be extended for an infinite number of blocks of five years.
What can you do?
An investor can extend their PPF account with or without contributions or can just stay invested with the investment made till date. Industry experts add, once an account is extended without deposits for a year, an investor cannot opt to make deposits in the account in that block period of five years. But the account will continue to earn tax-free interest even if the extension is made without any contributions. Experts suggest if there is no financial crisis for the investor, upon maturity of the account they should extend their account. This should be considered especially for investors in the higher tax brackets, as the returns post-tax are attractive.
How to do it?
After the original 15-year period, if you wish to extend the account, you need to inform the account officials by filing up the ‘Form H’. However, without filling up this form, if you keep depositing money even after the end of 15 years cycle, the deposits are not considered as regular deposits and interest is not paid on them. For instance, if an investor goes to withdraw their money from the PPF account after 20 years, without filling up the Form H, they will only receive interest on the initial investment made during the first 15 years, and for the rest of the 5 years no interest will be paid. Also, tax benefits under section 80C of the Income Tax Act will not be applicable on the 5-year deposits.
Make partial withdrawal
You can only make partial withdrawals after the sixth year onwards, in the initial 15 years period. However, if you have opted for an extension of your PPF account with a contribution, partial withdrawal can be made once a year during the five-year block by applying through ‘Form C’. During the five-year block period, total withdrawal of up to 60 per cent of the balance can be made. Whereas, if you have opted for an extension of your PPF account without contribution, you can withdraw any amount within the balance once in each financial year. The leftover amount in the PPF account continues to earn interest.
Closing your account
You can also close your PPF account but only at the end of the 15-year cycle. For closing an account, officials of the post office or the bank need to be informed and the entire amount will be paid at that time.
In case of a financial crisis or shortage of cash flow, experts suggest, depending on the financial situation, investors can use the proceeds from a PPF account on expiry after the first 15-year period, to pay off any existing debt. The proceeds can also be used to invest in higher yielding assets like equity instruments. Anil Rego, founder and CEO, Right Horizons says, “The proceeds PPF money can also be used to invest in high-yielding assets like equities, depending on the investor’s financial situation. One should invest part of the money in equity mutual funds, based on an asset allocation that suits you.” However, if you have less than four to five years to invest before your financial goal, then equities should be avoided.