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.).
PersonaFinancePlan Take
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.
59 thoughts on “How to use PPF account as a pension tool?”
Sir.My husband and I have a total PPF balance of Rs.22,00,000 and Rs.8,00,000 respectively in our accounts.If both of us invest Rs.1,50,000 lumpsum before 5th April every year,what will be the final PPF corpus for both our accounts at the end of 15 years assuming 8.6% interest?Please calculate and let us know.Thanks
Approximately Rs 1.2 crores for your husband and Rs 73 lacs for you.
Ref: above question by Mrs. Pai
Not sure but I thought there was a rule in the olden days that for any tax saving the contribution for any tax saving has to from an earning from that particular financial year only. If we contribute before 5th April can that be technically disqualified for tax benefit as for salaried personnel first salary is end of month or 30th april
No. There is no such rule.
If income tax department is suspicious about the source of funds, it will call you for scrutiny.
Is there any provision in PPF account to withdraw amount on monthly basis as pension
Dear Ravinder,
There is no such provision. You can withdraw only once every year after maturity of 15 years.
Hi Deepesh, using PPF as a tax free annuity was a GREAT idea !! Never thought of it from that perspective…thanks a ton.
You are welcome, Kapil.
Please do share with friends and family.
Hi Depesh, i would like to know that what is the best option for pension after 60 years age…is there any high return investment as FD not giving better rate of interest and PPF have some restiction for initially 15 years later 5 years each, cannot make the good plan.
so advice best solution to overcome and make healthy and better retirement plan.
Thanks
Dear Sir,
It is not possible for me to comment unless I have good idea of your financials. Your level of savings, your expenses, any other source of income during retirement, tax information etc. All this information is needed to chalk out an effective retirement strategy. Hence, you are likely to find my answer unconvincing.
I understand PPF may not be an option to those who have just retired. For PPF to be an effective pension tool, it must be at least 15 years old.
There are many options you can consider. I am not saying you must use these.
There is Senior Citizens Savings Scheme (it gives 8.6% per annum, interest is taxable, benefit under Section 80C). The interest will most likely be higher than a fixed deposit. Then, there are tax-free bonds. Annuity plans may be worth considering in certain cases.
You can also use a bucketing system where you use funds for 5 year buckets in different instruments (60-65, 66-70, 71-75, 75-80 and so on).
Retirements can be long.Hence, don’t just restrict yourself to debt products.
Sir,
Following your superb suggestions but one thing I felt that is we are not looking toward economy and its impact on interest rates. Right now PPF rates have sharply slashed.
It would be of great help if you can go into depth of it and suggest best way for investment and wealth creation for age group of 28-30 years.
Dear Jigar,
PPF rates are still quite high. You also need to see that interest on PPF is exempt from tax.
There is nothing wrong with Indian economy.
28-30 years have many years of earning ahead of them. Hence, their ability to take risk is higher. Do consider equity mutual funds. However, that does not mean invest only in equity mutual funds. Consider other asset classes too.
Asset allocation is always important.
If I a son turns 18 can the father still keep depositing amounts in his PPF account or the father has to stop contributing. In other words if son account is extended by 5+5 years can father continue contributing with or without availing tax benefits.
Also does father continue to get tax benefit under 80C in this case (of course son is not availaing any benefit as he is studying)
Yes, you can continue contributing to your’s son account even after he turns major and keep getting tax benefits under Section 80C.
I am a Pensioner and drawing pension through Pension Account opened in a SBI Branch. I have also opened a PPF Account in the same branch of the SBI with a request to link the PPF Account to Pension Account to enable SBI CPPC to deduct monthly income tax on the basis of projected annual pension income after taking into account the rebate on PPF deposit. I have submitted on 17.05.2016 the details of savings under PPF in Form 12BB as required under Section 26C of Income Tax Act. The Branch Manager of my SBI Home branch is not able to do the requisite for want of software for that purpose. My request is still pending with him. He is neither refusing nor doing the needful. I have already visited three times. Kindly advise what to do in these circumstances since SBICPPC official concerned is insisting to do the needful through the SBI Home Branch only.
I am a Pensioner and drawing pension through Pension Account opened in a SBI Branch. I have also opened a PPF Account in the same branch of the SBI with a request to link the PPF Account to Pension Account to enable SBI CPPC to deduct monthly income tax on the basis of projected annual pension income after taking into account the rebate on PPF deposit. I have submitted on 17.05.2016 the details of savings under PPF in Form 12BB as required under Section 26C of Income Tax Act. The Branch Manager of my SBI Home branch is not able to do the requisite for want of software for that purpose. My request is still pending with him. He is neither refusing nor doing the needful. I have already visited three times. Kindly advise what to do in these circumstances since SBICPPC official concerned is insisting to do the needful through the SBI Home Branch only.
Dear Sir,
Sorry, I don’t have much idea about this. Won’t be able to help in this matter.
Wonderful idea,I am following this steps.Really it works.
Can you please explain what is the pension that is being attributed from my monthly ppf contribution. When and how much pension will I be getting. I am shortly completing 10 years of ppf contribution.
Dear Hari,
Technically, PPF does not offer any pension.
You must structure your withdrawals in a way that your use only the interest amount and your PPF investment remains intact.
You can withdraw only once per year in case of PPF. Hence, you can only structure an annual pension.
The annul amount will depend on the PPF corpus and the prevailing interest rate.
Hi Deepesh,
In PPF scheme with 1 crore at the end of 15 yrs, can I take out the 8.5 lakhs interest every year, while I continue the PPF account without contribution ? this way, the 1 crore is in tact and I can still take out 8.5 lakhs for my life after retirement ?
Dear Sir,
It depends on the prevailing rate. For instance, these days the rate is 8%.
The idea is that your corpus should not deplete.
If at the end of 15 years, the corpus is 1 crore. After 1 year, it will be Rs 1.08 crores.
You take out Rs 8 lacs. Rs 1 crore will still remain and earn interest.
Hence, if you withdraw more than RS 8 lacs, then your principal will start depleting.
Thanks Deepesh.IT is EPF not PPF. Every month EPF statement indicates a pension component. May I know what it is please ?
Dear Hari,
The amount goes towards EPS.
Suggest you go through following post on another website.
http://www.bemoneyaware.com/blog/eps/
Will answer most queries.
dear deepesh,
in your opinion which is a a better thing to invest PPF or a private pension fund.
regards.
Dear Chaitanya,
It is not easy to compare PPF and pension funds. Quite different products.
Depends on many things.
With PPF, you are stuck for at least 15 years (if you have not opened PPF account as yet).
PPF provides only annual cashflow (if you choose to use it as a pension tool).
PPF is a pure debt product. You may want an equity exposure too if you retirement is many years away.
Private pension plans have an expensive cost structure. Provide poor returns (if you are talking about traditional pension plans).
Personally, I do not like pension plans (there might be need for an annuity plan though in select cases).
About PPF, you need to see its suitability to your case.
Currently I am working in another country, but still contributing to my existing ppf account opened 5 years back ,i will return to india after 7 years and stay in india for rest of time. In this case the extension of 5 years is possible
In my opininio, if you are a resident at the time of maturity, you should be able to get an extension.
Can Husband deposit cheque’s into wife’s PPF account ? I mean the source of funds is Husband’s salary, it this allowed ? Will incometax department insist that the source of funds has to be that of the wife ?
A husband can deposit money in wife’s PPF account. No problem with that. A husband also get tax benefit for contribution to wife’s account.
Interest income will be clubbed with husband’s income. Does matter much since PPF interest is exempt from tax.
Could you plz advised me that I have only 21 lac as a fixed deposit no other income.
In this circumstances what could I do for interest income or better return?
Not sure I got the context of your question right. If that’s the case, there wouldn’t be any tax liability since interest income will be below minimum tax exemption limit. You can file form 15G/15H to avoid TDS.
Sir,
My age is 42 , I want to take pension plan, how & which plan is better, pl advice me.
Why do you want to purchase a pension plan?
Sir,
My mother is getting retired so can we invest in PPF. Can we open a PPF account for her? Would 15 years maturity would apply for her?
Is there any provision in PPF that helps withdrawal liquidity after 60 years or the lockin of 15 years would apply.
Could you please suggest some invest options for retirement corpus?
Dear Pragya,
There is no maximum age for opening a PPF account.
Therefore, your mother can open a PPF account but the rules are same for everyone.
Initial maturity of 15 years is there for everyone.
Is there any minimum age restriction for opening PPF account?
No
Good article!
Thanks deepesh.
Thanks Abhilash.
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Sir i am a Major in army …i am married and have one year old son…
I am from lucknow…pls may i know if i can open two different account for ppf ….one for myself in which i contribute 150000 per year n second my wife ….who opens a ppf acct for our son….for same 150000…….in this way a total of 3 lacs……is it possible sir ….Regards
Hi Major Prashant,
You can open account for yourself And you wife can open account for her.
Either of you can be guardian for your son’s account.
The contribution limitation is that you cannot contribute more than Rs 1.5 lacs combined in your account and those PPF accounts where you are the guardian.
Your wife can be the guardian in your son’s account. You can gift her the money and then she can invest in son’s account (or her account).
That way, you can invest Rs 3 lacs for the family in PPF.
Good day, Mr. Deepesh,
I am at a age of 55 now and my wife at 50.
I work for a private organisation, with a take home of 1.00 lack Pm.
How far is is advisable to invest in PPF at this stage.
I have savings of 2 LIC,on my name and one on my wife name, out of which 2 policies are payable for next 5 years.
I have a Max Life Insurance with Axis bank at 1.00 Lack / PA for 5 years payable started last Aug 2016.
What is the best possibility, do I need to do if I need a pension amount of Rs. 1.00 Lack PM
No very much, sir. If you have not even opened a PPF account, it may not make much sense to open one now.
If you already have one, then you can continue.
For a pension of Rs 1 lac pre-tax (and not adjusted for inflation), you need a corpus of Rs 2 crores.
The number only goes up if you consider taxes (because pension is taxable) and inflation.
Btw, pension is not the only way to generate income during retirement
https://www.personalfinanceplan.in/opinion/best-ways-to-generate-regular-income-during-retirement/
Contact a SEBI Registered Investment Adviser or a financial planner for specific advice.
Sir , I am a pensioner having the PPF account in post office and pension account in SBI bank. Form 16 provided by the bank do not reflects the PPF amount , Hence IT department is not considering the PPF contribution for tax relief . Please advise what can be done .
Regards
You can specify PPF contribution while filing return and get tax benefit.
Please talk to a CA.
Sir ,
At current time interest rate is cut down to 7.8% and is continuously going down only .How much one can expect maturity return after 30 years if current ppf amount is 7.5 lakh around with this interest rate ?
Sonakshi,
Your guess is as good as mine.
Interest rates don’t always go down. Interest rates move in cycle.
PPF makes for an excellent debt product.
At current rate, 7.5 lacs will grow to about 71 lacs in 30 years.
HI Deepesh,
Thanks for a wonderful article…
My Current age is 42 years. If i start investing 1.5 lakh from April 2018 how much will be my corpus in 15 years. Also i can gift my wife 1.5 every year (non taxable) and open an PPF account for her as well.
Please advise….
Hi Mufazzal,
You are welcome.
Can’t comment about maturity amount since that depends on PPF interest rate, which is announced by the Government every quarter.
Yes, you can gift Rs 1.5 lacs to your wife’s account and she can invest in her PPF account. No problems with this approach.
I am going to retirement on 30/10/2019. MY PPF A/C 20 Years complete on 31/3/2018. I want know PPF A/C Continue with or without contribution.
Dear Sir,
Didn’t get your question.
You can go for either. It is your choice.
Thank you for such an informative article. I read your another article on how LIC Jeevan Anand is not a worthy option. So now I am considering a term insurance and PPF . I am 50 years old and would be thankful to you for an advise on this. Is PPF a good option for me now at this age, I wish to use it as a pension tool. Any other advise you would suggest in my situation. Thank you.
Dear Chandan,
If you need insurance, go for term insurance.
About PPF, you must understand that the account matures in 15 years. Therefore, you won’t be able to access funds until the age of 65.
I think you must consult an investment advisor who can recommend a portfolio in line with your risk appetite and goals.
Thank you for taking the time to respond. Highly appreciate it.
Thnaks for such a brilliant article, I never thought of it. I would like to make one comment on using ppf as pension. Take for example, If one have 1 cr. in her account, then he will earn around 8 lakhs a year as tax free interest. if she withdraw all of this 8 lakhs each year, her principle amount will not be preserved because of inflation. Therefore, one should take into account inflation and withdraw only as much, so that his principle is preserved. One simple method (I thought) may be to withdraw only the amount which is equivalent to (interest rate-inflation) % of your principle. So if interest rate is 8.5 % and inflation is 4.5 % for the above case, then only withdraw 4% of 1 cr. That is 4 lakhs a year instead of 8 lakhs to preserve your principle from inflation. May be, you can put more light on this.
You are welcome, Nakul.
What you say makes complete sense.
Inflation is one aspect where most debt products will struggle.
Therefore, you can
1. either withdraw only so much that your corpus continues to grow and hopefully counter inflation. As you mentioned. This is not easy to do btw.
2. or take some exposure to growth assets such as equity, which is more likely to beat inflation over the long term. This one is a bit tricky especially for someone who has never invested in equity before. Need to look at risk appetite before deciding.
Hi Deepesh ,
Your article is very informative and good to read comments where you responds on real life finances. Could you please throw some light on below points :
1) How about investing some amount in VPF ( 8.55% in 2019 ) now ( locking period of 5 yrs ? ) and invest less in PPF ( only 7.8 % ) for low salaried employees ?
2) If I invest 5 lac in PPF today how much would I get in 15 Yrs at 7.8 % ?
Thanks
Hi Rishav,
Nice point. EPF/VPF gets you a higher return. Just that you can’t continue after retirement. Can be a bit difficult to manage.
You can’t invest Rs 5 lacs at one go in PPF.