PPF is a really useful and popular debt investment product for Indians. Not only it offers tax benefits under Section 80C (up to ₹1.5 lakh), it also offers risk-free, tax-free 7.1% with sovereign backing. And that is as good as it can get in an environment which is increasingly moving to tax everything.
But what to do when your PPF account completes 15 years?
First, let’s see what options are available once your PPF account near maturity at the end of 15 years:
The first option is to close your PPF account on maturity. You get the entire PPF corpus that you have accumulated tax-free. And the account ceases to exist from that day onwards.
The second option is toextend PPF for 5 years without future contributions. This is where the tenure of your PPF is extended by 5 years, i.e., 15+5 years. So, your account continues to earn interest during those 5 years as per the prevalent PPF interest rates. But the only catch is that you are not allowed to make any fresh contributions during this 5-year extension period. And can you withdraw money from the account? Yes, you can and as much as you want, but only once every year. This is also the default option which gets applied if you don’t inform your choice to the bank or post office where you have the PPF account.
The 3rd and final option is toextend the PPF account for 5 years but this time, with contributions. What this means is that everything else remains the same as the previous option. The only difference is that you are allowed to make contributions to your PPF account every year during the extended 5-year period. Both your existing corpus as well as the extra fresh contributions continue to earn interest. As for the withdrawals, in this option, you are only allowed to withdraw a maximum of 60% of the PPF balance which was available at the start of the 5-year extension period. And like the previous option, you can only make one withdrawal per financial year.
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So that are the 3 available options. Now how to decide and choose one among these? While the answer may be different for different individuals, here are a few pointers to help you take a call:
If you don’t need the money accumulated in your PPF account for the next 5 years for sure, then best to extend it, and that too go with the ‘extension-with-contribution’ option. Getting 7.1% tax-free is a reasonably good option assuming PPF is part of your overall debt allocation in the portfolio.
If you are a retired individual and have a large amount parked in PPF (due to long duration, multiple extensions, etc.), then you can use your old PPF account as a sort of pseudo-pension tool to generate tax-free income to an extent. How is that possible? Let’s take an example. Suppose your PPF has ₹40 lakh. Now on maturity, you pick the extension-without-contribution option. Now you can easily withdraw say 7% annually, i.e., ₹2.8 lakh at the end of each financial year. That way, if the PPF interest is 7.1%, your principal remains untouched and you can just keep withdrawing interest every year as a sort of tax-free pension income. But this is to be done if there is a need to generate income for the retiree. If the income requirements are already managed, then obviously there is no need to make withdrawals and instead, allow PPF and interest to keep compounding.
If you are young and somehow, your PPF has completed 15 years, then for you the best option is to continue it with contributions. But given that you are young, make sure you also invest in equities sufficiently and not just rely on your PPF savings to ensure that you generate inflation-beating returns in the long run.
That is how you can go about deciding whether to close or extend your PPF account.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.