How to make the most of your PPF account
Beyond income tax and compounding benefits, PPF account offers the facilities like loan, partial withdrawal and account extension.
The government has retained the 8% interest rate on the popular PPF or Public Provident Fund (PPF) for the January to March quarter, making it an attractive investment for conservative investors. Apart from tax benefits, the PPF also helps build a sizeable corpus for long-term goals like retirement. Being a 15-year-old savings scheme, the PPF provides the benefit of compounding over a long period. In terms of income tax implications, the PPF has an EEE or ‘exempt, exempt, exempt’ status, meaning that it provides subscribers with deduction benefit up to Rs 1.5 lakh under Section 80C on deposits and tax-free interest and returns.
A PPF account allows the facility of partial withdrawal, loan and account extension beyond 15 years.
An investor can hold a PPF account in his or her name or even open one in the name of a minor but together the contributions can’t exceed Rs 1.5 lakh in a financial year. Deposits can be made in lump-sum or in 12 instalments. If the subscriber is opting for the monthly mode, it is advisable that he/she invest before the fifth of every month. For interest calculation, the balance is taken as the minimum between the fifth day of the month and end of the month. This means that if the subscriber deposits after the 5th of the month, then he/she loses out on a lot of interest income for that particular month.
Loan from PPF account
A subscriber is allowed to take a loan of 25% of the balance amount available, from the third to the sixth financial year after opening the account. But the account should be active. A new loan cannot be taken until the old loan has been paid off. Also, a loan can be taken only once in a year even though the loan taken in the year is repaid in the same year. The loan taken against the PPF account has to be repaid within 36 months.
PPF partial withdrawal
The PPF account, which has maturity period of 15 years, can be closed prematurely after completion of five years. But it is allowed only for specific reasons like higher education or expenditure towards medical treatment. But starting from the seventh year of account opening, a PPF account holder can make one partial withdrawal every year. The partial withdrawal is capped at 50% of the total balance at the end of the fourth year immediately preceding the year of withdrawal or the year immediately preceding the year of withdrawal, whichever is lower. Partial withdrawals from the PPF are also tax-free. Partial withdrawals are also allowed even if the PPF account is extended beyond 15 years. (Read: PPF partial withdrawal rules explained)
PPF account extension
A PPF account matures after 15 years and a subscriber can retain the account after maturity without making any further contribution. The balance in the account continues to earn interest till it is closed. The subscriber can make one withdrawal of any amount in each financial year. However, if a subscriber wants to make further contributions after the PPF account matures, it can be extended in blocks of five years. (Read: Public provident fund (PPF) account extension after maturity: 10 rules)
There is no limit on the number of times the subscriber can extend the PPF account. But the subscriber has to submit Form H within one year from the date of maturity of the account, if he or she wants to extend the account in the contribution mode.
Revival of dormant PPF account
According to PPF rules, the subscriber has to deposit a minimum of Rs 500 a year; otherwise, the account becomes inactive. If the account remains dormant, the subscriber cannot make contributions. The subscriber also becomes ineligible for partial withdrawal or loan facilities. But the amount already deposited continues to earn interest and the subscriber can only withdraw full amount at maturity, which is 15 years after the account was opened.
To reactivate an inactive PPF account, the subscriber has to visit the bank branch or post office where his account is held, and submit a written request. A penalty of Rs 50 for each financial year is levied.
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