Don’t ignore the old warhorse — PPF

Regular readers of this column would know that one of my most favourite investment instruments is the Public Provident Fund (PPF). I strongly believe that every Indian, male or female, salaried or self-employed, married or unmarried, should have a PPF account ticking for him or her.

Leave aside the tax deduction, leave aside the 8% tax-free interest —- this is your social security. Over 16 years, an annual contribution of Rs 70,000 grows to over Rs 21 lakh, which is almost 30 times the annual investment. The capital built over time can serve multiple purposes — catering to children’s education, medical emergencies and even retirement.

Apart from the tax deduction under Sec 80C and the 8% tax-free interest, the general framework of a PPF account has several other features and nuances. Based on feedback received from readers, today’s article focuses on some of these key but lesser known aspects of PPF.

Withdrawals
Many readers have complained that even bank officials aren’t aware of the rules, especially on how much can be withdrawn and when.

It is to be noted that though PPF is a 15-year instrument, it ignores the year of opening the account. Therefore, it actually becomes a 16-year account and the account holder can contribute to it even during the 16th financial year, even on the last day. This creates confusion in case of withdrawals.

Let’s take an example. Let’s suppose your account was opened in FY 1993-94.
Maturity date: Add 15 to the financial year end => 1994 + 15 = 2009. Account matures at the end of the 2008-09 financial year, on April 1, 2009.

First withdrawal date: Add 6 to the financial year end => 1994 + 6 = 2000. It can be effected in 1999-2000.

Amount of first withdrawal: The 4th preceding year will be 2000 - 4 = 1996 (FY 95-96) and preceding year 2000 - 1 = 1999 (FY 98-99). Amount withdrawable in the 7th year, FY 1999-2000 is 50% of the balance to the credit as on March 31, 1996 or March 31, 1999, whichever is lower.

Slightly complicated, but once you go through it a couple of times, it becomes clear.

Reviving dead accounts

Another frequently asked question is to do with forgotten, ‘dead’ accounts. In a specific case, a reader’s father had opened an account for her some seven years back but she had never bothered much about it. Now, seven years on, could she open a new account or could something be done about the old one?

Well, if the investor fails to subscribe even the minimum Rs 500, the account is considered as discontinued. Loans and withdrawals are not available from a discontinued account. At the end of the term, the investor will be paid the balance with accrued interest for the full term.

However, the good news is that it is possible to revive the old account by contributing Rs 500 with a penalty of Rs 50 for each year that the account lay dormant. This fact is not known to many. They feel that very old discontinued accounts cannot be regularised. Note that the penalty does not attract any interest or deduction.

Post-maturity treatment

By far the most commonly asked question is to with post-maturity treatment of PPF. In other words, what happens after the 16 year period is over?

Though some investors start a fresh PPF account, the idea of keeping funds locked in for another 16 years does not appeal to all. Especially to investors of an advanced age who look towards an element of liquidity in their investments.

But did you know that once the initial term of 16 years of PPF is over, you can extend the account for 5 years at a time and that too indefinitely? In other words, instead of 16 years, the same PPF account can be converted into a 5 year scheme and what’s more —- with additional liquidity than what it offered during the initial term. If this feature of PPF is used optimally, it can be literally converted into a 5-year deposit that offers the 8% tax-free interest, tax saving under Sec 80C and immense liquidity — and all this for your lifetime.

As already mentioned, at its maturity, the PPF account can be continued for a block period of 5 years. This facility is available for any number of block periods — there is no limit on how many times you can extend the account.

Now, this continuation can be with or without further contributions. The only thing that investors should be careful of is that once an account is continued without contributions for any year, the subscriber cannot change over to with-contributions extension. [Notification F.3(6)-PD/86 dt 20.8.86].

Liquidity

An investor 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. For example, say the term of your PPF account is ending on March 31, 2009. The balance at that time in the account is say Rs 15 lakh. Now, you may opt to continue the account for five more years (i.e. till March 31, 2014) and invest regularly as you have been. However, over the period of five years till March 2014, you may withdraw Rs 9 lakh, which is 60% of the balance to your credit as on March 31, 2009.

What if you wish to continue but not invest further? That too is possible. In case the account is extended without contribution, any amount can be withdrawn without restriction. However, only one withdrawal is allowed per year. The balance will continue to earn interest till it is completely withdrawn.

Post-maturity continuation

There are a couple of formalities for declaring your intentions regarding post maturity continuance. Form-H is to be used to declare the intention of continuing the account with subscription for each extended period. It should be filed before the first contribution is made for the first year of extension. In its absence, the account will be treated as without-subscription extension. Fresh contributions made to such accounts will enjoy neither the deduction u/s 80C nor the interest (MoF (DEA) 7/21/88-NS-II dt 10.8.90).

Last point

It is also possible to invest Rs 1 lakh in PPF for those who wish to do so. Remember, Sec 80C doesn’t impose any sectoral caps on investments. It is PPF rules that limit the investment to a maximum of Rs 70,000 in the PPF accounts of self and minor child. However, tax deduction is also available under PPF for investments in the name of spouse and children. Consequently, one can invest Rs 70,000 in one’s own account and the balance Rs 30,000 in say the spouse’s or major child’s account and thereby avail of the full deduction of Rs 1 lakh through PPF.