Be it a salaried or a self-employed person, the Public Provident Fund (PPF) has been the default option for the middle-class when it comes to creating a long-term corpus. The PPF scheme is considered attractive on account of sovereign guarantee and tax benefits during investment, interest accrual and withdrawal stages. Here, we look at the workings and operations part of the PPF account.
PPF account, contributions and interest
An Indian resident can open one PPF account, either through post office or authorised banks, with a minimum initial deposit of ₹500. In this account, a minimum of ₹500 and a maximum ₹1.5 lakh should be deposited each year. The investment tenure is 15 years, starting from the end of the year in which you first made a deposit. For e.g., if you start making investments from April 3, 2023 (FY2023-24), the account will mature on April 1, 2039.
One can open a PPF account in the name of a minor (child). However, note that your annual combined contribution will be capped at ₹1.5 lakh only. When the minor turns 18, the parent should apply regarding the change of status. Further operations should be handled by the account holder herself/himself following submission of revised application along with her/his signature and the documents required to be attested with the application form.
If you are relocating to another city for employment or for any other reason, you have the option to switch your PPF account from one bank to another, or within same banks you can switch to different branch. In such a case, you need to submit a transfer application form and PPF passbook at the existing bank branch while a fresh KYC process shall be done in another bank/branch. If you know the PPF account number, you can continue to make deposits each year online without visiting the branch.
Loan and premature closure/withdrawal
Generally, you can withdraw money from the PPF account only after 15 years. However, if you feel the requirement of money due to any emergency or any other reason before the completion of 15 years, you have three options in place – loan against PPF account, partial withdrawal and premature account closing. For all the three options, there are different sets of conditions to be followed.
Say, by the end of FY2023-24, your account has a balance of ₹1 lakh. Considering the option of borrowing, you are eligible to avail loan during the starting of third FY to end of sixth FY from your account opening FY i.e., starting from April 1, 2025, till March 31, 2029. The borrowed amount can’t be more than 25 per cent of the account balance at the ending of the preceding second year from the borrowing date. For instance, if you wish to borrow in August 2025, the loan amount can be the maximum of ₹25,000 (25 per cent of balance at the end of FY2023-24). Here, the loan shall be obtained at the interest rate of one per cent more than the prevailing interest earned on PPF (7.1 per cent + 1 per cent = 8.1 per cent currently). The repayment of loan should be done within 36 months, failing which penalty of extra 5 per cent will be levied.
Post this period, you won’t be eligible for availing loans. However, from the start of seventh year from your account opening i.e. from April 1, 2029 (as example), you are allowed to withdraw partially from the account. Withdrawal limit shall be the 50 per cent of the balance at the end of preceding FY or at the end of fourth preceding FY whichever is lower. For instance, if you want to withdraw a certain amount in November 2030, you can withdraw up to 50 per cent of balance as on March 31, 2030, or that of March 31, 2027, whichever is lower.
Also, you can close the account prior to the maturity period with subject to certain conditions. You can close the account only after completion of five years from the end of the FY you started investing (from March 31,2029 in our case). However, it can be done only in case of events such as death of account holder, treatment of life-threatening disease of her family members and higher education. For premature closure, a penalty of 1 per cent shall be charged.
What after maturity
After the mandated 15 years, when your PPF account reaches maturity, one has three options. One, you can close the account and withdraw entire proceeds, post maturity. For this, you need to submit an account closure form. Two, if you don’t have an immediate requirement for the proceeds, you can extend PPF account without any fresh deposits. Doing this, you can continue earning interest on the balance at an applicable rate.
Three, you can also extend your PPF account with fresh deposits wherein you can continue making investments for one or more block of five years by filling Form-4. The account holder should inform the post office/bank about the extension of PPF account with fresh deposits before the expiry of one year from the maturity. Else, any deposit made in such account shall be treated as irregular and refunded by the accounts office immediately without any interest. Here too, one can make withdrawals but to the tune of maximum 60 per cent of the balance at the commencement of the block period. The withdrawal can be made either in single or in yearly instalments.