Premature Closure & Withdrawal Rules for Public Provident Fund(PPF):
Public Provident Fund(PPF) is a scheme introduced by the Ministry of Finance in 1968, for the creation of retirement corpus of an individual and has become a favourite investment option for many investors over a period.
Some of the salient features of PPF are listed below:
• Safe and secure investment option as it is backed by the government
• Retirement safety for the self-employed people and people working in the unorganised sector
• Tax-free returns
You can open a PPF account by just depositing Rs. 100. However, in a financial year, you have to deposit a minimum amount of Rs. 500 and the maximum cap is set to Rs. 1,50,000. You can deposit in multiples of Rs. 500 as a lump sum or in installments not exceeding the total deposit amount of Rs. 1,50,000 in a financial year. The maximum installments should not exceed; 12 in a financial year or 2 in a month.
If a minimum amount of Rs. 500 is not deposited in a financial year; the account will be marked as de-active. To re-activate the account, the subscriber has to deposit a penalty of Rs. 50 per year for the number of years the account has been de-active. Along with the penalty amount, the subscriber also has to deposit the minimum amount of Rs. 500 per year for the years the account has been de-active. There are multiple options available for the subscriber at the time of maturity.
PPF investment comes under Exempt-Exempt-Exempt (EEE) tax structure which means the amount invested, interest earned and the withdrawal amount are all tax-free. You can claim up to Rs. 1,50,000 in a financial year under section 80C of the IT Act, 1961.
Note: The interest rate for the PPF account is maintained at 8.1% for the second quarter of FY 2016-17 i.e. July-September 2016.From 1 Oct 2016, the interest rate on PPF has been revised to 8% p.a.
PF Withdrawal Rule
As per the old rule of PF withdrawal, complete withdrawal from a PPF account is only allowed at the time of maturity of the account i.e. 15 years. The subscriber is allowed to make partial withdrawals starting from the 7th financial year of the account opening date, subject to terms and conditions. Partial withdrawal is possible only once in a year.
PPF Premature Closure Rule
On June 18th, 2016, Ministry of Finance published a notice making an amendment in the Public Provident Fund Scheme, 1968. This amendment was with respect to the rules associated with the withdrawal policy of PPF corpus.
According to the notice, the new scheme will be called as Public Provident Fund (Amendment) Scheme, 2016. As per the new scheme, a subscriber shall be allowed premature closure of his/her account or the account of a minor for which he/she is the guardian, on a written application to the accounts office based on the following conditions:
1. The amount is required for the treatment of serious ailments or life-threatening diseases of the account holder, spouse or dependent children or parents, can be withdrawn on production of supporting documents from competent medical authority.
2. The amount is required for the higher education of the account holder or the minor account holder, can be withdrawn on producing the documents and fee bills in confirmation of admission in a recognised institute of higher education in India or abroad.
The premature closure shall be allowed only after the account has completed five financial years. Also, on premature closure of the account, the interest paid on the withdrawal amount will be one percent less than the applicable interest rate at the time of withdrawal, for the entire tenure.
Let me take you through the calculation of PPF account balance available at the end of the tenure i.e. 15 years through the illustration below, considering:
1. If you don’t opt for premature closure
2. If you opt for premature closure
Suppose Mr. Anil Sharma started investing Rs. 1,50,000 every year in his PPF account from Oct 2015 and continue to deposit the amount till 31st March 2030 assuming the applicable rate of interest to be 8.1% per annum compounded annually.
1. If you don’t opt for premature closure:
You can observe that the available balance for the premature closure at the end of the 5th year is Rs. 925701. On the other hand, if you don’t opt for premature closure, the available balance at the end of the 5th year is Rs. 953168. The difference in the balance amount is Rs. 27467.
Similarly, the available balance for the premature closure at the end of the 6th year is Rs. 1152076. If you don’t opt for premature closure, the available balance at the end of the 6th year is Rs. 1192525. The difference in the balance amount is Rs. 40449 and so on…
The difference in the PF amount balance at the end of 15 years is Rs. 368923, which is a huge loss for the investor. So, if you opt for the premature closer in the later years, the penalty will be much higher.
PPF is a product designed to meet the long-term objectives and retirement goals of the subscriber. Hence, it is prudent to keep the money in the account till the maturity unless it is inevitable.