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The post-maturity continuation facilities are an issue with banks as much as with investors
Public Provident Fund (PPF) as a savings instrument needs no introduction — it’s already very popular with the salaried lot as well as the business community.
I had written in detail about PPF and its post-maturity continuation facilities. The reader feedback on a specific issue necessitates that the topic be revisited.
Basically, the popularity of PPF comes as no surprise — over 20 years, an annual contribution of Rs 70,000 grows to over Rs 32 lakh, which is almost 46 times the annual investment.
This capital, built up over time, can serve multiple purposes like catering to the education of children, medical emergencies and even retirement.
Readers may have noticed that I have said the capital grows to a substantial sum over 20 years. But isn’t PPF a 15-year scheme? Yes, it is.
However, after the initial period of 15 years is over, one can keep on extending the deposit for a period of 5 years at a time. In fact, this is where the magic of PPF begins.
One need not start a fresh PPF account and continue it for all of 15 years — just extend the old one for five years at a time, indefinitely. This way, the same PPF account offers additional liquidity to what is offered during the initial term.
Overall, then, after the initial 15-year period, you can convert your PPF investment into a 5-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 term of 15 years) either with or without further subscription. The only thing that investors should be careful of is that once an account is continued without contribution for any year, the subscriber cannot change over to with-contributions extension. [Notification F.3(6)-PD/86 dt 20.8.86].
Coming to 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 instalment, but only one per year.
(Notification F.7/2/97-NS IIdt. 9.2.1998). For example, say the term of your PPF account is ending on March 31, 2007. The balance at that time in the account is say Rs 15 lakh. Now, you may opt to continue the account for 5 more years (i.e. till March 31, 2012) and invest regularly as you have been.
However, over the period of five years till March 2012, you may withdraw only Rs 9 lakh which is 60% of the balance standing to your credit on March 31, 2007.
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).
I was under the impression that these aspects of PPF 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 wants the investor to close the existing account and start a fresh one.
Yet another reader points out that his bank has specified that an extension will be allowed only for two blocks of five years each. After that, 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.
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.
There are several more similar complaints, but space constraints preclude listing all of them.
The issue does get resolved when you show them the rule book, of course, but it is felt that given the popularity and demand for the instrument, some training in PPF rules will prevent wastage of valuable time for both depositors and bank concerned.