DT Personal Finance: Should you renew or close PPF account on 15-year maturity?

LUCKNOW: PPF is a solid savings product that many of us have. And many times, it is our parents who would have opened a PPF account for us. Once opened, the PPF account has a tenure of 15 years. But what to do when the account completes 15 years?

Let’s have a look at the available options:

Close the account – Under this option, the entire accumulated corpus is paid out tax-free and the account gets closed.

Extend without contributions – The PPF rules allow for extension/renewal of PPF account by 5 years on completion. There are 2 options under this. Under the first option, the account is extended for 5 years but you are not allowed to make any fresh contributions in the account. So, the account balance at maturity (15 years) will continue to earn interest for the extended period of 5 more years. You are allowed to make one withdrawal every year and there is no limit on the size of the withdrawal. This is the default option that gets chosen in case the PPF account holder doesn’t communicate the choice to the bank/post office on maturity.

Extend with contributions – This is the second option under extension. Under this, you are allowed to make fresh contributions to your PPF account each year during the extension period. So, your PPF account balance as well as the fresh contributions continue to earn interest. Here also, you can make one withdrawal per year, but you can only withdraw a maximum of 60% of the account balance which was there at the start of the extension period.

So, these are the three available options. Now comes the question as to which option to choose.

Depending on each person’s requirement, the answers may vary. But here are a few pointers that can aid in decision making:

If you have accumulated a decent amount in PPF but still don’t need that money for the next 5 years, then it is advisable to extend it with contributions. Not only will the corpus keep earning tax-free returns each year but you also have sufficient liquidity as you are allowed to make one withdrawal each year.

If you were using your PPF account till now to save for a financial goal, then obviously you will need to use the money. Say you saved up Rs 15 lakh in PPF account for your daughter’s graduation. You might be tempted to close the account and take the full amount. And that is a fair thing to do. But even in this case, you can choose to extend without further contributions. This option also allows you to withdraw the full amount at any time. So, say for a 3-year graduation, you can withdraw Rs 5 lakh each year for 3 years and then later, you can continue to use the PPF account.

If you are a retired person who depends on interest/pension income etc., then you can use PPF account as a pension tool as well if you have a large enough PPF balance. Suppose you have saved up about Rs 40 lakh in PPF. Now on maturity, you pick extension without contribution option. You can then withdraw up to 7% annually, i.e., Rs 2.8 lakh. This way, if the interest is 7.1%, your principal remains intact and since PPF interest is tax-free, you get Rs 2.8 lakh as a sort of tax-free pension income every year. This strategy can be implemented using ‘with contribution’ option as the total annual withdrawal is less than 60% across the 5-year period.

While there is no one right answer to whether to extend or close the PPF account, extending your PPF account has multiple benefits as revealed by the above examples.