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The longevity clause in PPF

A steady job and a public provident fund (PPF) account are two things that an individual need to have social security.

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A steady job and a public provident fund (PPF) account are two things that an individual need to have social security. A number of investors seem to know this, at least gauging from the response that last week’s article on post maturity continuation of the PPF account generated. The idea was simple — after the initial maturity of the PPF account, it can be extended for five years at a time without any limit. For the investor, his PPF account becomes in effect a five year fixed deposit with the associated tax-free interest. Add to this, one can continue to invest and claim tax exemption or simply let the account earn interest. Withdrawals are also possible, thereby making the PPF ‘fixed deposit’ one of the most versatile and effective deposit products available.

Several readers responded, appreciating the piece and posing related queries of their own. Therefore, this week, I am going to share with you some of these queries particularly those that are of common interest and useful information related to this. Mukesh Shroff wondered whether he could keep his matured PPF account ‘dead’ without any further contributions (withdrawing only the interest) and simultaneously open another PPF account with another bank to take the necessary advantage of Sec 80C in the following years.

The answer unfortunately is in the negative, as a PPF account though matured, but not terminated, is not considered ‘dead’. In other words, if the investor does not close the account, it continues to earn the 8% interest and hence is ‘live’. And PPF rules do not allow an individual to have more than one account in his or her own name. Therefore, if any investor wishes to earn further tax-free interest, an account may be opened in the name of the spouse and an investment of Rs 70,000 may be made.

Atul Shah inquired about PPF accounts in the name of his Hindu Undivided Family (HUF). His HUF PPF account matures by the end of the fiscal and the bank has indicated that he cannot renew the account anymore. Is the stand taken by the bank correct? Yes, it is. An RBI notification in May, 2005, discontinued opening of the accounts on behalf of HUF. Such accounts opened by mistake after 13.5.05 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. The existing accounts can continue up to their maturity without the privilege of post-maturity continuation.

V Juvekar’s son had opened a PPF account when he was in India. Subsequently, he moved to the US and hence became an NRI. Now what happens to the PPF account? Can his son as an NRI continue to invest and will he be eligible for the tax benefits?

Actually, Juvekar’s problem is not that unique, in that, there are several persons who find themselves in a similar situation. Having opened a PPF account already, opportunity beckons abroad. In this case, the rule is similar to that in the case of the HUF mentioned earlier. RBI Circular GSR 585(E) dated 25.7.03 prohibits NRIs from opening a PPF account. They are, however, allowed to continue to contribute to their accounts opened before becoming an NRI, but only until maturity. Therefore, an NRI can continue to invest in an already opened PPF account (opened when he was a resident), however, again the facility of opening a fresh account after the earlier one matures or post maturity continuation of the first account is not available.

V Raghunathan and several others complained that they were not too familiar with the withdrawal facility of PPF, specifically in terms of how much can be withdrawn and when. They pointed out that sometimes even the bank officials aren’t too aware of the exact rules.

The withdrawal facility is best explained in terms of an example. Suppose the account was opened in FY 90-91. The PPF Rules ignore the year of opening the account. It claims to have a term of 15 years, but the account matures after 16 years and the account holder can contribute to the account during the 16th financial year, even on the last day. So is the case for withdrawals, this creates confusion. The following is an attempt to clear the confusion.

Maturity date : Add 15 to the financial year end (1991 + 15 = 2006). Account matures at end of ‘05-06 on 1.4.06.

First withdrawal date: Add 6 to the financial year end (1991 + 6 = 1997). It can be effected in 96-97.

Amount of 1st withdrawal : The 4th preceding year will be 1997 - 4 = 1993 (FY 92-93) and preceding year will be 1997 - 1 = 1996 (FY 95-96). The amount withdrawable in the 7th year, FY 96-97 is 50% of the balance to the credit as on 31.3.1993 or 31.3.96, whichever, is lower.

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

Rounding up, one of the best responses was from Smruti Kamat who wrote in saying that after reading the piece she wants to become a PPF investor all over again. ‘All over again’ because some seven years back, her father had opened an account for her, but she had never bothered much about it. Now, seven years on, would she have to open a new account or could something be done about the old one?

Well Smruti, 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 (raised from Rs. 10 by a notification dated 15.11.02) per year. 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.

Several readers have pointed out that some banks while renewing the account aren’t accepting Form H. This is irregular and may create a difficulty later on. Investors are advised to insist on submitting the form for continuation of the account by escalating the matter, if necessary to higher officials.

sandeep.shanbhag@gmail.com

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