If you thought you could not close your PPF account before 15 years, you are not right anymore.
Premature closure of PPF account is now a reality. In the notification dated June 18, 2016, the Government has permitted premature closure of PPF account subject to certain conditions.
Existing (Earlier) Rule about PPF closure
PPF account could only be closed after 15 years from the end of financial year in which the account was opened. So, if you opened account on June 15, 2012, you could NOT close your account before March 31, 2028.
Though PPF offered limited liquidity through partial withdrawals and loans against PPF account, the amount that you could get through partial withdrawals and loans was only a fraction of your PPF balance.
Must Read: All you need to know about PPF account
New Rule
Premature closure of PPF account before completion of 15 years is permitted subject to certain conditions.
You can close (prematurely) your PPF account or PPF account of a minor where you are the guardian.
However, there are no free lunches. There is penalty involved if you close your PPF account prematurely.
You can go through the Government notification here.
What are the Pre-conditions for Premature closure of PPF account?
Well, you cannot close your PPF account just like that. Premature closure of PPF is permitted only for medical treatment and higher education.
Let’s look at the specifics. Premature closure of PPF account is permitted:
- If the amount is required for the treatment of serious ailments or life threatening illnesses of account holder, spouse or dependent children or parents. You must produce supporting documents from competent medical authority.
- If the amount is required for higher education of the account holder or the minor account holder. You must produce supporting documents (fee bills, admission letter etc) from recognized institute of higher education in India or abroad. As I understand, you cannot close the account to fund your children’s education (unless child is the PPF account holder). Bizarre?
- Premature closure is allowed only after the account has completed 5 years. Though it is not mentioned explicitly, I assume it means 5 years from the end of financial year in which the account was opened.
What is the penalty involved?
For all the years that you have been invested in PPF, you will get 1% less interest rate. So, if PPF interest rate for FY2011 was 8%, you would get only 7% for FY2011. If the interest rate in FY2013 was 8.8% p.a., you will get only 7.8% p.a. for FY2013.
Now, this may not look like a big hit. However, since the returns are compounded, it can lead to a significant difference.
Let’s consider an example. Suppose you deposit Rs 1.5 lacs every year in your PPF account on April 1. For the sake of simplicity, let’s assume PPF interest rate stays constant at 8% through these years. You invest for 12 years and have to close the account prematurely at the beginning of 13th year.
At the end of 12th year, your balance would have been Rs 30.74 lacs. However, if you close the account at the end of 12th year you will get only Rs 28.71 lacs. That is a hit of Rs 2.03 lacs or 6.6% on your PPF corpus.
If you closed the account at the end of 7th year, the hit would have been Rs 56,523 (Rs 14.45 lacs vs Rs 13.88 lacs) or 3.91% of the accumulated corpus.
The impact on your corpus will depend on your investment pattern in PPF and the age of your PPF account.
This penalty has been put to discourage PPF subscribers from closing your PPF account prematurely.
There is also an illustration in the official notification. There is a minor error in the illustration but you will get the idea.
To note: Given how Government has backtracked on EPF proposal this year, don’t be surprised if this penalty is withdrawn subsequently under public pressure. However, this is mere speculation.
What about tax on premature closure of PPF account?
The amount will not be taxed unless Income Tax Department comes out with a new ruling. However, in my opinion, any taxation on premature closure is unlikely to withstand public pressure.
PersonalFinancePlan Take
The new rule has two aspects. You can argue PPF is meant for retirement and should have stayed that way. In my opinion, PPF is one of the best debt products to invest in for your retirement. On the other side, you can argue it is your money and what good it is if you can’t use it for medical treatment of a family member.
In my opinion, this is a good move. It gives you some flexibility. However, if you have make a choice between breaking your fixed deposits and closing your PPF account to fund medical treatment, make the right choice. Break your fixed deposits. Do not rush to close your PPF account.
Consider closure of PPF account as the last resort or the only way to avoid taking very expensive loan (formal or informal) to fund medical treatment.
You need to exercise some discretion.