Many readers often ask us variations of, “My PPF account is maturing; should I extend it or open a new one?” We discuss how to handle PPF accounts that are about to mature. When and how to extend them and when not to.
A PPF matures after 15 financial years from the FY of opening. For example, an account opened in FY 2000-01 (or before 31st March 2001) will mature on 1st April 2016. There are three options available to a subscriber after maturity. (1) Close the account and be done with it! (2) Keep the account open without further contributions. (3) Extend the account for five years with further contributions.
If we have been saving for a particular goal, option 1 is the right choice. Even here, an extension is a consideration. For example, say we run a PPF account as guardian for our child. This is meant for her college education. However, as the admission process draws near, if we can manage the funds from other sources (without dipping into the retirement corpus), we can consider converting the minor account to a major account and extending it.
In this case, the child will start her career with a PPF account with a lock-in of only five years, which can be extended indefinitely (in theory, at least! Practically, there may be some roadblocks from officials unaware of the rules). It will also have much better liquidity than starting a new account (see below).
On the other hand, liquidating the minor PPF account and starting a new one for the child after she turns 18 with her money is also perfectly fine. There is no “loss” here as the money can be used to partially/fully fund college, and the rest can be routed to the retirement corpus.
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If we choose option (2), the corpus will continue to earn interest! We can make one withdrawal each financial year for any amount. While this is a good option, it is of little practical use. If we withdraw without contributions, the corpus will soon drop to zero.
If the money is not required immediately (option 1 ) or in stages (option 2), extending a PPF account is a better choice. However, such an extension should be made within one financial year of maturity. The extension will require one or more physical visits to the branch. If contributions are made without extending the account, they will not earn any interest and are not eligible for 80C deductions. Once the extension is made, it cannot be revoked.
Withdrawal rule after extension: The subscriber can only withdraw 60% of the account balance at the start of the extension, either in one-shot or spread over the five years. Aside from the contributions, this is the key difference between options (2) and (3).
I was recently informed on Twitter that some banks do not approve of repeated PPF extensions and prefer that a fresh account be opened. The PPF rule book states that unlimited five-year block extensions can be made.
A subscriber may at his option (to be exercised before the expiry of the
first year of every extended block period) avail of this facility for a further block
of 5 years on expiry of 20 years or on expiry of 25 years and so on, from the end
of the year in which the initial subscription was made.
Also, we can exercise the option (2) after exercising the option (3) for any number of block periods.
If the account is continued with deposits for one or more block period of
5 years, the subscriber can leave the account without deposits on
completion of any block period. The account will continue to earn interest
till it is closed and the subscriber can make one withdrawal every year
form the account.
If you do not need the money to spend for the next five financial years, then extending the PPF account would be wise. If your asset allocation (for a goal that is far away – say 15+ years away) is debt-heavy, you can correct it in two ways after extension: (A) gradually withdraw from PPF to equity. (B) Temporarily and suitably reduce the investment to PPF.
Extending a matured PPF reduces the lock-in period and improves liquidity without impacting the tax-free status of the already accumulated corpus. It is a natural choice but must be done after appreciating personal circumstances, rules and limitations. When dealing with banks, it is best to assume they are unaware of the rules and keep the rule book handy.