How the new PPF rules affect your investments

PPF is a long-term instrument for channelizing savings, with a maturity period of 15 years. However, you are allowed to close the account prematurely – after the expiry of five years from the end of the financial year in which the account was opened – under specific circumstances. For example, closure is allowed for treating a life-threatening disease of not only the accountholder, but also the spouse, dependent children or parents. Similarly, you can close the account and withdraw the funds before maturity if you need the money to fund your (or the minor’s) higher education. The new rules also allow premature closure if the intended beneficiaries are dependent children. A change in your residency status is another valid ground now for closing your PPF account.

However, you will have to settle for a rate that is 1 percentage point lower than the rate at which interest has been credited to your account. Also, in all cases, you will have to furnish the required documents. For instance, in case of withdrawal to fund treatment of illnesses, you will have to produce supporting documents and medical reports from the doctor or hospital in charge of the treatment. Similarly, if you need the money for financing higher education, you will have to submit documents such as fee bills and confirmation of admission in a recognised institute of higher education in India or abroad. In case of change in residency, the premature withdrawal will be permitted after production of copy of the passport, visa or the relevant year’s income tax returns.

Loans for liquidity

A loan against your PPF deposits is another option to meet short-term liquidity needs. It is allowed from the third financial year of opening the account. The maximum amount of loan you can take is restricted to 25 per cent of the balance at the end of second year immediately preceding the year in which the application is made. For example, if you had opened the account in May 2013, you would be eligible to apply for the first loan in the financial year 2015-16. The maximum loan allowed in this case would be 25 per cent of the balance as on March 31, 2014. The principal amount has to be repaid within 36 months. Subsequently, you have to pay off the interest for the loan period in two monthly instalments. According to the new rules, the interest rate will be one percentage point higher than the prevailing PPF interest on offer, down from 2 per cent earlier. Therefore, in the current scenario, such loans will carry an interest rate of 8.9 per cent a year.