Public Provident Fund: 4 hidden rules you should know

Public Provident Fund (PPF) is a super investment vehicle with EEE status – it provides deduction at the time of investment , the interest earned is also tax free and the maturity proceeds are also tax exempt. Currently the rate of interest for PPF is 7.10%. PPF is 100% safe as it is backed by the Government of India. Below are some of the lesser known facts about PPF:

Tenure of PPF account

There is a lock-in of 15 years. But this lock-in is not calculated from the date of opening of account. This lock-in is calculated from the end of the financial year in which the account is opened.

For example: PPF account opened on 01st April 2008, 01st August 2008, 01st January 2009 and 31st March 2009 will all have the same maturity date of 31st March 2024 whereas the PPF account opened on 01st April 2009 will have the maturity date of 31st March 2025.

Also Read: Public Provident Fund (PPF) among six investment options for single mothers

Options on maturity of PPF account

There are three options at the time of maturity of PPF account. Before discussing these options, let’s create an illustration as well.

Mr. Superman opened his PPF account in January 2009. After 15 years from the end of the financial year in which the account was opened – the PPF account has matured on 31st March 2024. The balance in the account, including interest is ₹10 lakhs.

a) Mr. Superman can withdraw 100% of the amount. This is the simplest to understand, most commonly known and the only option known to the relationship manager of Mr. Superman.

Mr. Superman also has flexibility to stagger the withdrawal throughout the years and make multiple withdrawals – but only till 31st March 2025.

In case option  (a) is exercised – Mr. Superman is free to open a new PPF account. Please note at one point of time – one individual is allowed to open only one PPF account. 

Also Read: How to reactivate your lapsed PPF account — A step by step guide

b) Mr. Superman can extend the PPF account for a block of 5 years with contributions. Mr. Superman, needs to fill form H and can extend the account for 5 years.

The form H needs to be filled within 1 year of maturity i.e. before 31st March 2025. In case Mr. Superman misses to fill the Form H, then by default option (c) explained below will be applicable.

The withdrawal limits are simple in this option – you can withdraw 60% of the accumulated amount at the beginning of each extended period (block of 5 years). 

c) Mr. Superman can extend the PPF account for a block of 5 years without making any further contributions. 

In case option (a) or (b) is not exercised, this is the default option.

This is simple to understand – Mr. Superman can simply stop contributions and continue to earn interest. The best feature in this option is that Mr. Superman is free to withdraw any amount. He can exercise the withdrawal option once a year.

In option (b) and option (c) the extension for a block of 5 years can be taken as many times as Mr. Superman wants.

Once the option (c) is exercised – at the next reset – i.e. at the completion for a block of 5 years – Mr. Superman doesn’t have the option of going for (b) for the next block of 5 years.

But in case option (b) is exercised – at any reset – Mr. Superman can simply skip filling Form H and change the option to (c).

Also Read: Stock Market, Public Provident Fund to Mutual Funds: Six best investments that can make you rich

NRI: Account opening, subscription and extension

• As a NRI you cannot open a new PPF account.
• In case you opened the PPF account while you were a resident and later your status changed to Non Resident – you can continue to make subscriptions.
• As an NRI when your PPF account matures – you have to mandatory go for option 2 (a). You do not have the option of extending the account.
  
  Also Read: From PPF to gold: Four top investment assets for Indian women 

PPF account for minor

• Either of the parents can open a PPF account for their minor kid.
• The account can be opened by one of the parents only. Meaning both mother and father cannot open the PPF for the same kid.
• Combined limit is 1.50 lakhs. Let’s say Mr. Hero has a PPF account and he has a daughter named Barbie. Mr. Hero under his guardianship has opened the PPF account for daughter as well. In a particular financial year – the total subscription in PPF account of Mr. Hero & Barbie collectively should not exceed 1.50 lakhs
• In case Mr. Hero dies – the PPF account of Mr. Hero will be closed and the accumulated balance will be paid to the nominee. But the death of Mr. Hero will not lead to the closure of the Barbe’s PPF account. The guardianship will be changed.

Remember, when you go to the bank to open a PPF account – your Relationship Manager may try to push traditional insurance policies/ ULIP and bad mouth PPF. Stick to PPF.

Nishant Batra, Co-founder of Holistic Prime Wealth Private Limited