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What to do when your PPF completes 15 years?

Public Provident Fund, arguably one of the best fixed-income investments, comes with a 15-year tenure. But there is a way to continue it without locking in your money for another 15 years

May 10, 2022 / 08:48 AM IST

Unlike many instruments, where you need to take your money after maturity or reinvest the proceeds at the prevailing interest rate, Public Provident Fund (PPF) offers you some flexibility.

PPF is a 15-year instrument and arguably India’s best fixed income investment. Your contributions earn you income-tax deduction benefits under Section 80C, up to an investment of Rs 1.5 lakh. Interest and redemption too are tax-free. But what do you do with your PPF account once it complete 15 years?

If you do not need the PPF money for a few years more, it’s best to extend the account maturity by 5 more years. In fact those who are earning well can also choose the Extension-With-Contributions option.

But that’s not your only option. Let us look at how people with different requirements must decide what to do with a maturing PPF account.

Before we discuss that in detail, let’s first have a look at what all options are available. Broadly, there are three options:

Close the PPF account 

Take the entire PPF corpus tax-free. The account gets closed for good.

Extend for 5-years WITHOUT Contributions

In this, the PPF account tenure is extended by 5 more years but you do not make any fresh contributions. The account balance continues to earn interest for these 5 extended years.

And what if you need to withdraw money? You can do it but only one withdrawal is permitted every year. But there are no limits on the size of the withdrawal. So from the PPF account balance of Rs 25 lakh, you can even withdraw Rs 23 lakh in one shot during this extended period (with this chosen option)

Extend for 5-years WITH Contributions

In this case, you will have to make (at least minimum) contributions to your PPF account every year during the extended period. The account balance and fresh contributions continue to earn interest.

But there are a few withdrawal restrictions. During the 5 years, you can only withdraw a maximum of 60% of the account balance that existed at the start of the extension period. So if you had Rs 40 lakh at the start, you can withdraw 60% of that, which is Rs 24 lakh. Also, only one withdrawal per year is permitted.

Just remember, if you do not inform the bank or post office about your choice of extension, then Extension-Without-Contribution is the automatically chosen option.

Also, any change of interest rate throughout the tenure of your instrument also affects existing PPF accounts and their entire balance. The good part is that unlike other fixed income investments, like a bank deposit, you do not need to reinvest your proceeds into a fresh account with a new tenure, once your PPF matures. The extension of just five years, given that PFF’s tenure is 15 years, is reasonable.

By the way, the extension process will require you to visit the branch physically at least once. And given the nature of many branches and how they handle things, you should have patience and know the rules of extension beforehand. There have been cases where branches have forced people to close PPF accounts and start new ones with fresh 15-year lock-in!

Also read: Choosing between the VPF and PPF for additional debt investments

That was about the available options. Now comes the question of how to use these options.

How to choose the right maturity extension/closure option?

Here are a few thoughts on picking from among these options:

  • A simple thumb rule to follow is that if you don’t need the PPF money for the next 5 years (and you are pretty sure about it), then it is best to extend it with contributions. Also, if possible do make contributions over and above the minimum threshold requirement of Rs 500 per year. PPF is still a great tax-free EEE status product.

  • If you are still young and in your 30-40s, it’s quite probable that you don’t need PPF money for any goals as such. So best to continue with it ‘with contributions’. Of course, it goes without saying that just PPF will not be enough. If you are young, make sure you invest in equity substantially, via monthly SIPs in mutual funds.

  • If you are a retiree with a large PPF balance, you can use it as a pension tool as well. Suppose you have Rs 50 lakh in PPF. Now, let’s say you pick the extension without contribution option. Now you can go ahead and withdraw up to 7% annually, i.e. Rs 3.5 lakh at the end of each financial year. That way, if the interest is 7.1%, your principal remains intact and since PPF interest is tax-free, you get Rs 3.5 lakh as a sort of tax-free pension income every year. This strategy can be implemented using ‘with contribution’ option as the total annual withdrawal is less than 60% across the 5-year period.

  • If you were using PPF for a particular goal, let’s say, having Rs 20 lakh for your child’s education, then obviously you cannot ‘not’ take out money from the account. It might look as closing the account is the obvious option. But even in this case, going for an extension without further contributions is a good choice instead of closing the account as you can withdraw the full amount at any time. Or let’s say for a 4-year course, you just withdraw 25% of your PPF balance every year. Later on, you can continue to use the PPF account normally (albeit with a much lower balance).

So as you can see above, what one does with a maturing PPF account depends entirely on one’s requirements and circumstances. Like all things in personal finance, one size doesn't fit all.

Dev Ashish is a SEBI Registered Investment Advisor (RIA) and Founder, StableInvestor
first published: May 10, 2022 07:23 am