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Premature closure of PPF account attracts an interest rate penalty

Five PPF rules you may not be aware of

  • PPF accounts can be extended beyond 15 years, with or without making further contribution
  • Partial withdrawal is allowed from PPF accounts and while premature closure is allowed in specific cases

PPF or Public Provident Fund is one of the most popular long-term savings option. An subscriber can make annual contribution ranging from 500 to 1.5 lakh in a financial year. The interest rate on PPF is revised every quarter and for the April-June quarter, it fetches an interest rate of 8% per annum. PPF account has a tenure of 15 years and can be renewed in blocks of five years. It also enjoys income tax benefits. NRIs are not eligible to open an account under the PPF scheme but they can continue to hold their pre-existing PPF accounts, which were opened while they were resident.

1) How to maximise PPF interest earnings: The interest rate on PPF deposits is not fixed. The government revises interest rates every quarter, depending on the yields of government bonds. The interest is compounded annually and credited at the end of the financial year. An investor can choose to deposit the money as a lump sum or in a maximum of 12 contributions per financial year. But the key point to note is that the interest is calculated every month on the lowest balance between the 5th and last date of each month. So ideally a subscriber should deposit the contributions or lump sums before the 5th of each month. If you have the lump sum, invest before 5 April to get interest on the entire amount for the entire year.

2) Premature closure of PPF account and interest deduction: A PPF account can be closed prematurely under special situations, provided the account has completed five years. A PPF subscriber is allowed premature closure of the his/her account or the account of the minor of whom he/she is the guardian, if that amount is required for the treatment of life threatening disease of the account holder, spouse or dependent children or parents on production of supporting documents. Premature closure is also allowed if that amount is required for higher education of the account holder or the minor account holder on production of documents in confirmation of admission in an institute of higher education in India or abroad.

However, premature closure of PPF account attracts an interest rate penalty of 1%. Or in other words, the PPF subscriber will get 1% less interest as was applicable.

3) PPF deposits enjoy legal protection from court attachment: The PPF balance in the subscriber’s account enjoys protection against attachment under any decree or order of any court in respect of any debt or liability incurred by the depositor.

4) PPF partial withdrawal: Subscribers can one withdrawal every year, from the seventh financial year. The withdrawal amount is capped at 50% of the balance of the customer credit at the end of the fourth year immediately preceding the year of withdrawal or the amount at the end of the preceding year, 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 year.

5) PPF account extension: A PPF account matures after 15 years and a subscriber can retain the account after maturity, with or without making any further contribution. The balance in the account continues to earn interest till it is closed. But it is to be noted that if a subscriber wants to make further contributions after the PPF account matures, it can be extended in blocks of five years. 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. There is no limit on the number of times the subscriber can extend the PPF account.