Sandeep Shanbhag: Make no mistake, a PPF account is forever

Public Provident Fund (PPF) as a savings instrument needs no introduction —- it is already very popular with the salaried class and the business community alike. In fact, in past columns, I had written in detail about PPF and its post-maturity continuation facilities. However, reader feedback on a specific issue necessitates that the topic be revisited.

The instrument’s popularity is not surprising. Over 20 years, an annual contribution of Rs70,000 grows to over Rs32 lakh, which is almost 46 times the annual investment. This capital, built over time, can serve multiple purposes such as catering to the education of children, medical emergencies and even retirement.

But why did I say 20 years when the PPF is a 15-year scheme. It’s because, after the initial period of 15 years, one can keep extending the deposit for five years at a time.

In fact, this is where the magic of PPF truly begins. One need not start a fresh PPF account and continue it for all of 15 long years —- just extend the old one for five years at a time, indefinitely. This way, the same PPF account can be converted into a five-year deposit. What’s more, this comes with additional liquidity over that offered during the initial term. So, basically, you can convert your PPF investment into a five-year deposit that offers 8% tax-free interest, tax saving under Sec 80C and immense liquidity —- and all this for your lifetime.

Now, let’s briefly examine the rules of extension.
The PPF account can be continued (after the initial 15 years) with or without further subscription. However, once an account is continued without contribution for any year, the subscriber cannot change back to with-contribution extension. [Notification F.3(6)-PD/86 dt 20.8.86].

Coming to liquidity, an investor who is continuing his account with fresh subscriptions can withdraw up to 60% of the balance to his credit at the commencement of each extended period in one or more instalments, but only one per year. (Notification F.7/2/97-NS IIdt. 9.2.1998)

Say the initial term of your PPF account is ending on March 31, 2012. The balance at that time in the account is say Rs15 lakh. You may opt to continue the account for five more years (i.e. till March 31, 2017) and invest regularly as you have been. However, over the next five years, till March 2017, you may withdraw only Rs9 lakh, which is 60% of the balance standing to your credit on March 31, 2012.

But what if you wish to continue but not invest further? In other words, you may wish to earn the tax-free interest but may not wish to commit further funds. That too is possible. In case the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year. The balance will continue to earn interest till it is completely withdrawn. (Clarification 7 to Clause 9(3A) of the PPF Scheme, 1968)

Even NRIs can invest in PPF, provided the PPF account had been opened before the person became an NRI. In other words, as per Notification (GSR 585(E)) dated July 25, 2003, though NRIs are prohibited from opening a fresh PPF account, a resident who subsequently becomes NRI during the currency of its term or an NRI who has opened the account before the date of this notification may continue to subscribe till maturity on a non-repatriation basis.

This means, NRIs cannot open a new account or extend the scheme beyond its maturity. Such accounts opened by mistake after the respective dates of notifications shall be treated as void ab initio. As and when (and if) the error comes to light, the account shall be closed and the amount refunded to the depositor without any interest.

I was under the impression that these are aspects of PPF that are not commonly known amongst investors. However, it turns out that some bank branches too aren’t fully aware of these rules. Several readers have written in complaining that their bank has flatly refused to extend the account and instead want the investor to close the existing account and start a fresh one.

A reader points out that his bank has specified that an extension will be allowed only for two blocks of five years each, after which the account will have to be closed.

In another case, the bank official specifies that post 15 years, 60% of the closing balance may indeed be withdrawn, but this has to be done at one shot —- more than one installment will not be allowed.

Yet another bank dictates that withdrawal after maturity has to be done in a similar fashion as it was being done during the tenure of the scheme.

NRIs too aren’t spared. If the subscriptions are done through an NRO cheque, some bank officials refuse to accept the same saying PPF isn’t open to NRIs.

Space constraints preclude listing all of the complaints here. The issues do get resolved when the officials are shown the rule book, of course, but it is felt that given the popularity and demand for the instrument, some training in PPF rules will save valuable time for both depositors and the bank concerned.

The writer is director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com