PPF or public provident fund have the same features as of employee PF fund except in PPF there is no employer contribution. In all other respects, PPF rules are the same as PF rules. PPF rules pertaining to partial or complete withdrawal are also same as PF withdrawal rules.
PPF investments have long term tenure of fifteen years. An investor can start a PPF account with a minimum annual investment of Rs 500. The maximum investment amount in PPF is Rs 1.5 lakh in a financial year. PPF schemes offer stable risk-free returns of 8% to 9% throughout the plan tenure.
Investors in PPF schemes can also withdraw the amount from PPF accounts subject to PPF rules. Let us know here the salient PPF rules regarding a withdrawal from PPF accounts:
PPF rules for withdrawal are subject to sanctions. Investment in PPF schemes does not have short term liquidity objective. PPF plans should be chosen for long term risk-free assured accumulated savings. PPF schemes have a long tenure of fifteen years. Yet this also renders a certain advantage. Small periodic investments get stable risk free accrual and create a sizeable amount corpus by the end of the plan tenure. Though PPF rules have certain stringent guidelines for withdrawal, yet the scheme does allow withdrawal for meeting life milestones.
If an investor needs to withdraw money from PPF account then s/he can do so from the seventh year of the PPF scheme. Barring certain emergency conditions, PPF rules do not provide for withdrawal or closure before the seven-year period. An investor should only apply for premature closure or premature withdrawal from PPF account if faced by certain pressing life circumstances. These can be employment loss, accident, illness, business loss, and other reasons.
As per PPF rules provisions, any kind of money received from PPF account is completely tax exempt. It can be withdrawn money amount, PPF maturity amount or PPF account closure amount. However, PPF money received before five years by premature closure or withdrawal is taxed as income. PPF account closed before five years have tax benefit reversal effect.
Under tax benefit reversal, tax benefits received in previous years, get reversed in the present financial year. U/s 80c contributions made to PPF account as monthly investments can be deducted from the income. This is a tax deduction benefit. Under tax benefit reversal, the entire amount deducted in previous years is taxed as income in the year of plan closure.
Availability of loan facility is a salient benefit of having a PPF account. The following PPF rules apply to PPF account loan facility:
PPF account holder can take a loan against his/her PPF account from the start of third Financial Year (FY) and till the end of the sixth FA. For example, if you start a PF plan in FY 2015-16, you can avail loan from the start of FY 2017-18 (April 1, 2017) till FY 2020-21 end (March 31, 2021).
PPF rules do not provide for complete PPF account withdrawal as a loan. The loan amount can be within 25% of the balance at a two-year closing immediately preceding loan application year. For loan application in FY 2018-19, up to 25% of the balance in the account as on March 31, 2017, can be taken as loan.
As per PPF rules, existing loans need to be repaid within 36 months. For loan taken in June in any FY, 36 months tenure starts from July 1 of the same FY. New loans cannot be taken from PPF account until exiting loan has been paid off.
Loan principal amount repayment can be made as a lump sum or in two or more than two months installments. The repaid principal amount shows as credited balance in PPF account.
Loan interest amount repayment starts after principal amount repayment. Loan interest amount has to be paid within two monthly installments. Outstanding interest amounts are directly debited from PPF account if not paid within 36 months loan tenure.
The Interest rate on PPF loan is prevailing PPF interest rate +2 %. For example, if prevailing PPF interest on the invested money is 8%, then interest on the loan will be 10%. Prevailing interest rates on PPF investments are announced by the government in each quarter and can vary within 1 % limits. PPF loans have fixed interest rates. Rate once levied does not change over the loan repayment tenure.
+6% interest rates are charged instead of +2% for PPF loans not repaid within a stipulated time period of 36 months.
Money can be withdrawn from PPF account from the commencement of the seventh year of the PPF plan. For PPF plan started in FY 2018-19, withdrawal from the account can be made from April 1, 2024.
PPF rules do not provide for complete balance withdrawal. The account holder can partially withdraw from the balance sum amount. As per PPF rules, the lower of the following amount can be withdrawn:
For example, if PPF account is opened in FY 2013-14, PPF account holder can apply for withdrawal in 2019-20. PPF account holder can withdraw up to the lower of the following:
PPF rules do not provide for the complete withdrawal of active PPF account. If the PPF account holder needs to make a complete withdrawal, then the PPF account will have to be terminated. Termination of PPF account is not advised. However PPF rules, as per PPF Act 2016 amendments, allow for PPF account premature closure after completion of five financial years of PPF plan.
PPF account closure is permitted for meeting expenditures of serious life milestones. These can include medical treatment expenses of self or family member or education expenses of children. The PPF account holder would need to support the account closure application with relevant documents.
Premature closure of PPF account would fetch 1% less interest rate than what was applicable for each quarter. The lessened interest rate will be applied from the starting year till culmination year till date.
PPF account holder gets lump sum maturity amount at the end of fifteen years tenure of PPF account. The lump sum maturity is credited to the linked savings account of PPF account holder through online transfer. The lump sum amount is the invested money compounded at PPF interest rates. Compounded interest rates yield interest amount on interest money as well as principal investment amount. The lump sum amount is tax-free.
Here it is not advised to close a PPF account prematurely for reinvesting in smart investment options. However, lump sum money received from PPF account maturity at the end of fifteen years can be put into smarter avenues. Top investment options for investors include:
Investor can choose from a wide range of mutual fund options. Short term MF schemes of 1-2 year can provide around 8% to 10% interest rate and liquidity. Equity-based open-ended MF schemes of three-year lock-in can provide annualized returns more than 17% to 18% on average. ELSS or equity schemes are also eligible for tax deduction benefits u/s 80c. Mutual funds have better flexibility, returns, and liquidity features under managed portfolios.
Investor may also choose to invest in the new age reconstructed ULIPs plan portfolios. New age ULIPS are offering MF matched returns and are eligible for tax benefits u/s 80c and 10d. These are the preferred modes of investment for investors who seek total life solution plans for self and family.
The FD rates have now again become attractive of around 8.5% after a long spell of low-interest rates regime. FD incomes below Rs 2.5 lakh a year are not subject to tax slab rates. TDS cut by banks/POs on FD interest can be avoided by submission of form 15 G/H. FDs offer advantage of short tenure, risk-free returns and liquidity to investors.
PPF account holder can also choose to extend PPF account for five-year tenure upon PPF account maturity. PPF account has its own advantages. The returns are well enough and risk-free. PPF rules that apply to normal PPF accounts also apply to extended PPF account.
Extended PPF accounts are eligible for the same tax benefits as the normal PPF accounts. An investor can withdraw money from extended PPF account from start, as per requirement, subject to PPF rules. The tenure of extended PPF accounts is 5 years, instead of 15 years. Extended PPF account can be renewed for another 5 years period or closed after completion of 5-year tenure.
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