A Public Provident Fund (PPF) account has been and remains one of the favorite investment tools for most people. And why not? You get tax benefits for investing in PPF account and interest earned is tax-free. There is no tax implication even at the time of withdrawal.
A maturity period of 15 years instills strong investment discipline. If asked, most of us won’t be able to list out any other benefits of a PPF account. However, the benefits of a PPF account do not end here. In this post, we will discuss a relatively less known feature of a PPF account.
We discuss maturity rules for PPF account and how its extension features make PPF account an even better savings and retirement tool. We will discuss how you can leverage the inherent flexibility in a PPF account to make it an excellent pension instrument. Let’s start with maturity rules for a PPF account.
Maturity rules for PPF
The PPF account matures after 15 years (after the end of financial year in which the account was opened). For example, if you open a PPF account on December 5, 2012, your account will mature on March 31, 2028. At the time of maturity of PPF account, the account holder can withdraw the entire corpus if he/she so desires.
At maturity, the account holder also has an option to continue PPF account any number of times in blocks of 5 years. You can extend your account in blocks of 5 years any number of times. So, you can extend PPF account in blocks of 5 years at expiry of 15 years or on expiry of 20 years or 25 years and so on. Extension of PPF account can be done in two ways.
Extension of PPF Account Without contribution
Under this option, you will not be able make any further contributions to your PPF account. This is the default option. If you do not close the account after maturity or extend it with contribution within one year, your PPF account will be extended under this option automatically. Once the PPF account is renewed without contribution, you cannot switch back to with contribution extension. The balance in the PPF account continues to earn interest. You are allowed one withdrawal per financial year. In this case, there is no limit on the amount that you can withdraw from your PPF account. You can even withdraw 80% or 90% in the first year itself. However, only one withdrawal from PPF account is permitted per year.
Extension of PPF Account With contribution
Under this option, you will have to make regular contributions to PPF for another five years. However, there is some relaxation in withdrawal rules on extension of PPF account. You can withdraw up to 60% of the balance amount at maturity in the next five years. Additionally, the restriction of 1 withdrawal per year applies in this case too. For example, if you PPF account has Rs 50 lacs at the time maturity (completion of 15 years) and you choose to continue the account with further contribution, you can withdraw a maximum of Rs 30 lacs from your account in the next 5 years. Apart from this, there is no other restriction on withdrawal. You can even withdraw Rs 30 lacs in the first year itself. However, in such a case, you won’t be able to withdraw anything from your account in the next four years.
You have to subscribe for this option within one year from the maturity of the account. If you don’t do so within the specified timeline, your account would be extended without contribution, which is the default option.
These extension rules make PPF a great savings tool
Even before first maturity (completion of 15 years), PPF is an excellent savings tool. It falls under EEE tax regime i.e. contribution to PPF is eligible for deduction under section 80C, interest is tax-free and proceeds are exempt at the time of withdrawal. However, after completion of 15 years, PPF becomes an even better savings instrument.
If you renew your account with contribution for another five years, not only do you earn tax free interest, you have flexibility of withdrawing up to 60% of the amount (at the commencement of 5 year block) during the next five years. We will do a small comparison with a tax saver FD (as both mature in 5 years).
The interest rate for PPF notified for Q4FY2018-2019 is 8.0% per annum while prevailing interest rate for 5 year tax saving FD rates ranges between 7% and 7.5% p.a. for various banks. The interest on FDs is taxable while interest earned in your PPF account is tax free. Hence, if you renew for 5 years with contribution, you can avail deduction under Section 80C for investments, earn tax free interest and have the flexibility of withdrawing from the PPF account. This beats any tax saving fixed deposit on every account.
If, on the other hand, you renew without contribution, you earn tax free interest for 5 years with no restriction on withdrawal from PPF account.
PPF can be a great pension instrument too
If you extend PPF without contribution, it can act as a great pension tool too. For instance, suppose you have Rs 1 crore in your PPF account at the completion of a particular block (15/20/25 years and so on). Assuming the notified interest rate for the year is 8.5% p.a., your PPF account will earn a tax free interest of Rs 8.5 lacs in the year. You can withdraw Rs 8.5 lacs at the end of year and your principal amount will still be intact. If the interest rate stays at 8.5%, you can earn tax free interest (or pension) of Rs 8.5 lacs per annum for life. In any pension plan/annuity product that you opt for, your pension income is taxed as per your income tax slab. However, with PPF, there is no tax to be paid. Hence, no pension plan/annuity product is likely to be as competitive.
If you are thinking about how to get Rs 1 crore in PPF account, consider this example. If you contribute Rs 1 lac every year for a period of 30 years, your PPF account balance will be ~1.24 crores at the end of 30 years (assuming interest rate of 8.5% p.a.).
A PPF account is a very good debt investment product and we recommend readers to open PPF accounts, if they haven’t already. It provides excellent tax adjusted returns. Extension rules provide additional flexibility and make PPF an excellent pension tool too. A PPF account, if used smartly, is likely to beat any pension plan/ annuity product available in the market.
Open a PPF account and contribute generously to your account every year. However, you are advised not to rely solely on savings in your PPF (or any other debt instrument) for all your retirement needs. Though a PPF account offers good post tax yield, it may still not be able to beat inflation in the long run. You must take adequate exposure to equities/equity mutual funds to secure your future post retirement.