DT Personal Finance: Close 15-year PPF on maturity or extend for 5 more years?

CHENNAI: Many of you already have a public provident fund (PPF) account that you have been using to save money for years. And while equity- oriented youngsters may look at PPF with skepticism, that still doesn’t change the fact that PPF continues to be a very useful debt investment option.

For the time being, PPF offers 7.1% tax-free with a sovereign guarantee. And this is still a good deal in an era where everything seems to be moving towards getting taxed. If you don’t have a PPF account, my strong suggestion is to open one as soon as you can. At least the 15-year period will start. But what if you already know why PPF works well and have an account which is close to maturity after 15 years? You have 3 options available as your PPF account nears maturity: Close PPF account on maturity – This is simple.

You close the account on maturity and get the entire accumulated corpus tax-free. Extend PPF for 5 years without contributions – This second option is where you extend your PPF account by 5 years.

The account continues to earn interest during that extension period but you are not allowed to make any fresh contributions during this period. You can withdraw from the account but only once every year. Do note that if you don’t inform your choice to the bank or post office where you have the PPF account, then this is the automatic option that is chosen on 15-year maturity.

Extend PPF for 5 years but with contributions – The third option is to extend and also be allowed to make contributions to your PPF account up to Rs 15 lakh every year during the extended period. Both your existing corpus (at the time of 15-year maturity) as well as the extra contributions you make during the 5 more years, will earn you tax-free interest.

You are only allowed to withdraw a maximum of 60% of the PPF balance that was available at the start of the 5-year extension period and you can only make one withdrawal per financial year. Now how to decide which option to choose? Here are a few suggestions: If you don’t have a requirement or need for the money accumulated in PPF for the next 4-5 years (or are still young and earning), then best to extend it for 5 years and not close it. Risk-and-tax-free 7.1% is a reasonably good deal.

And if you think you still have money to invest more, then go with the ‘extension-with-contribution’ option so that you can continue to contribute more to this instrument. If you are a retired individual and have a largish PPF corpus already, even then you can extend it and not close it. And given the PPF withdrawal rules, you can use your PPF account as a proxy pension tool to generate tax-free income.

Suppose over the years, your PPF account has grown to a solid Rs 50 lakh. Now on maturity, you pick the extension- without-contribution option. At the current interest rates of 7.1%, the PPF interest being generated is close to Rs 3.55 lakh in a year.

So now you can easily withdraw this Rs 3.55 lakh at the end of each financial year. That way, if the PPF interest remains at 7.1%, your principal (or account balance of) Rs 50 lakh remains untouched and you can just keep withdrawing interest every year as a sort of tax-free pension income.

But if there is no income requirement, then there is no need to make annual withdrawals and instead, allow PPF and interest to keep compounding. So that is how one can decide what to do with PPF on maturity.

There is no one right answer here as the decision should be based on the individual’s circumstances and unique requirements. Note: The word ‘saving’ has been used above, though practically it stands for both saving and investing.