Public Provident Fund: An answer to a secure future

The Public Provident Fund (PPF) is amongst the most popular investment option. Besides the tax deduction and eight per cent tax-free interest, it also acts as a social security cover.

Over 16 years, an annual contribution of Rs 70,000 grows to over Rs 21 lakh, almost 30 times the annual investment. This capital, built over time, can serve multiple purposes like catering to the education of children, medical emergencies and even retirement.

Investments: One can invest Rs 1 lakh in PPF for those who wish to do so.

Let's remember, PPF rules limit the investment to a maximum of Rs 70,000 in the PPF accounts of self and minor child. Section 80C doesn't impose any sectoral caps on investments.

However, tax deduction is also available under PPF for investments in the name of spouse and children. Consequently, one can invest Rs 70,000 in one's own account and the balance Rs 30,000 in, say, the spouse's or major child's account and thereby avail of the full deduction of Rs 1 lakh through PPF

Withdrawals: Though PPF is a 15-year instrument, it ignores the year of opening the account. Therefore, the account actually becomes a 16-year one and the account holder can contribute to the account even during the 16th financial year, even on the last day.

The first withdrawal can happen only in the seventh year. The amount is limited to 50 per cent of the balance of the credit as it was, either four years back or one year back, whichever is lower.

Reviving accounts: If the investor fails to subscribe even the minimum Rs  500, the account is considered discontinued. Loans and withdrawals are not available from a discontinued account.

At the end of the term or any time thereafter, the investor will be paid the balance with accrued interest for the full period.

However, the good news is that it is possible to revive the old account by contributing Rs 500, with a penalty of Rs 50 for each year that the account was in the discontinued state. Note that the penalty does not attract any interest or deduction.

Extending investments: You can keep extending your PPF account even after the initial term of 16 years of PPF is over. Each time, the extension is for five years.c So, the same account can be converted into a five-year recurring deposit that offers the eight per cent tax-free interest under Section 80C and immense liquidity.

This continuation can be with or without further contributions.  However, once an account is continued on maturity without contributions for any year, the subscriber cannot change over to with-contributions extension.

Liquidity, continuing: An investor, continuing his account with fresh subscriptions, can withdraw up to 60 per cent of the balance to his credit at the commencement of each extended period.

He could either withdraw this amount at one go or in installments over the next five years till the extended period is over.

However, withdrawals are allowed only once each year. So, suppose the balance at that end of the PPF term is Rs 15 lakh and the investors wants to continue investing for another five years.

He can withdraw Rs 9 lakh, which is 60 per cent of the balance Rs 15 lakh in his account. He could either withdraw the entire Rs 9 lakh at one time, or withdraw the same amount in installments over the next four years.

He may even choose to not withdraw at all. In case, the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year.

The balance will continue to earn interest till completely withdrawn. In other words, the account can be used to set up an yearly pension.

To continue post-maturity subscriptions, one has to fill in the Form-H before the first contribution is made for the first year of extension. 

Without the form, all contributions will be returned without any interest as and when the default is noted by the account office.

The writer is Director, Wonderland Consultants.