Quite often, most discussions on the Public Provident Fund (PPF) are about the accumulation phase and how beautifully the concept of compounding works in PPF. But many don’t realise that under the current rules, PPF can work as a tool for pension as well. That is, of course, assuming your PPF has a sizeable balance.
PPF is one of the most compelling financial instruments in our investment portfolio, despite many finfluencers, drunk on equity markets, trying to tell you otherwise. And despite the government’s decision (for some reason best known to them) to not increase the interest rates from 7.1 percent (since 2020), it still remains one of the preferred investments for many.
The question: Can PPF work for you when you need regular income in your retirement years? Let’s see how it works. This might be of more interest to those who have old, well-funded PPF accounts and have the need for a steady income stream in their post-working life.
How much can you withdraw from PPF?
I have already written about the maturity options in PPF after the account completes the original 15-year tenure. A short refresher will help, though. The first option is to close the PPF account on maturity. The second option is to extend it for five years ‘without contribution’. And the third and final option is to extend it for five years ‘with contribution’.
There is no limit on the number of times PPF subscribers can extend their accounts in blocks of five years each. So, with repeated extensions, it is possible to continue your PPF account for 20- 35 years, as well.
This extension feature is what makes PPF a potent tool for generating a regular flow of tax-free income in your later years if you plan well.
After the PPF account has completed 15 years, and you decide to exercise the option to extend it by five years with/without contribution, your PPF balance continues to earn tax-free interest.
More importantly, during the extension periods, you are allowed to make one withdrawal each year. For accounts that have been extended for five years without contribution, you can withdraw as much as you want from the PPF balance. And for ‘with contributions’ extended accounts, you are allowed to withdraw a maximum of 60 percent of the account balance at the start of the extension period.
Also read | How to use EPF, PPF, and NPS (G+C) to handle the debt side of your long-term portfolio
Using PPF as a pension tool
Suppose you and your spouse have been diligently saving money in PPF for years. Now at the completion of the 15th year, assume both of you have accumulated Rs 40 lakh each in your PPF accounts. Since the accounts have completed the full 15 years, you choose to extend them for a period of five years.
Now current PPF rates are 7.1 percent. So you can safely make yearly partial withdrawals of up to (say) 7 percent annually, i.e., Rs 2.8 lakh from each PPF account, totalling Rs 5.6 lakh, at the end of each financial year.
What happens then is that since the interest rate is 7.1 percent, your principal remains intact and since PPF interest is tax-free, you get Rs 5.6 lakh as a sort of tax-free income every year between the two of you. Converted to monthly figures, it’s like getting a Rs 46,000-47,000 monthly in tax-free pension.
Not bad for many elders with big PPF accounts and income requirements. Note that the choice of extension, i.e., with/without contribution, won’t impact things as under both cases, you are withdrawing once a year and within the overall annual withdrawal limits.
And on a post-tax basis, it is much better than most of the taxable pension/annuity options available in the market nowadays.
How to accumulate a large PPF account balance
This is a genuine concern as unless you have a big balance, your withdrawals may not amount to much. And the government is hell-bent on not increasing the yearly Rs 1.5-lakh upper limit for investments.
There are no tricks to this. It will without doubt take years.
Assuming a 7.1 percent interest rate, if you contribute Rs 1.5 lakh each year for 25 years, i.e., 15 years + two five-year extensions, you will reach a corpus of Rs 1.03 crore at the end of the 25th year. If you have a spouse, and if both of you contribute Rs 1.5 lakh yearly (totalling Rs 3 lakh annually), then the same corpus can be achieved in about 17-18 years.
So if you can hold off on your desire to close your PPF account after 15 years and allow it to extend it by a couple of blocks of five additional years, you will end up with a significant corpus. I know I am talking about 25 years, but that is how compounding works. It takes time.
End note: This discussion comfortably assumes that PPF will stay in its current avatar without too much tinkering of rules and taxation by future governments. Fingers crossed!
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