Always shut down your PPF Account at the end of its term.
By A N Shanbhag
It would be only appropriate for me to start by complimenting Om Prakash Ketan, the Executive Director of the HRD Centre, whose intriguing query it was that prompted me to write this piece.
In my last column in BT, I had pointed out that it was advisable to withdraw as much as possible as soon as possible from your Public Provident Fund (PPF) Account, as per the premature withdrawal rules, during the course of its 16-year term.
What I was asked was if the same strategy held good in the case of post-maturity continuation as well.
Now, post-maturity, you have only two options:
You can close your old PPF Account, and open a new PPF Account.
Or you can opt for the post-maturity facility that allows the continuation of the PPF Account for a block-period of five years and, thereafter, another five years -- and so on.
I believe that the best feature of the PPF Scheme is the income-tax rebate. Once you claim it on the contribution you have made to the Scheme, the sum gets locked up for a fixed period of time, earning a tax-free return at the rate of 12 per cent per annum.
While there was a time when no other investment avenue offered as much, either tax-free or post-tax, that is no longer true. For, the amount you withdraw can now be diverted to, say, the growth-oriented mutual fund schemes, which yield an annual return of 13 per cent.
You can also devise a strategy to make this completely tax-free by taking advantage of Section 54-EB of the Act (See A Zero Tax Game, BT, April 7, 1998). And this is applicable not only to premature withdrawals, but also to the sum you get if you close your Account at the end of its term.
If you continue the Account with fresh subscriptions, either at the end of the original term or at the end of each block-period, you can withdraw an amount not exceeding 60 per cent of the balance to your credit at the commencement of the extended period subject to the condition that the number of withdrawals will be only one per year.
On the other hand, you can retain the balance without any subscription. In that case, you can withdraw the amount in one, or more, tranches -- not more than once a year -- until the entire sum is withdrawn. However, I suggest that you do not even think of continuing your old Account and, simultaneously, opening a new one too.
A new Account-holder has to wait for six years for premature withdrawal facilities whereas the lock-in is five years in the case of post-maturity continuation. On the other hand, when you close an account, you can withdraw 100 per cent of the balance whereas you can draw only 60 per cent on continuation.
The difference is, thus, one year against 40 per cent of the amount.
Personally, I believe that the lesser the lock-in period, the better it is. Senior citizens should take note of this; they are, often, reluctant to open a new Account under the mistaken notion that this will commit them for 16 years. Actually, the balance can be withdrawn by the nominee without any lock-in period whatsoever.
Look at it another way: while the PPF pays a 12 per cent per annum rate of interest, in the case of post-maturity continuance, the withdrawals in five years can only be 60 per cent of the sum.
So, if you withdraw 12 per cent every year, you will have converted your extended PPF Account into a pension plan.
Trouble is, while this may have been a good strategy some time ago, mutual fund schemes that allow partial withdrawals are clearly superior investment-vehicles today.
Therefore, close your old PPF Account at the end of its term and open a new PPF Account. That, I feel, is the most mature approach to the post-maturity continuation of a PPF Account.