My PPF account is maturing: should I extend or open a new one?

Last Updated on February 17, 2021 at 10:21 am

When we open a PPF account, the maturity date seems far away; However time flies, and before we realise it, it is time to make a decision: should I extend my PPF account for another five years or should I open a new one? The answer always depends on one’s personal circumstances, and extension is not the obvious choice—a discussion.

Let us first consider the options and rules: We all know that a PPF matures after 15 years. Or 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 or open a fresh account. (2) Keep the account open without further contributions. (3) Extend the account for 5 years with further contributions.

A PPF account can be extended in five-year blocks for life (option 3). The bank or post office staff are expected to be familiar with these options and associated withdrawal limits, but many investors have complained about the difficulty in extending, particularly the second time (15 +5 years after account opening). Therefore before approaching the bank staff, it would be best to understand the rules.

The key difference between option 2 and 3 is the withdrawal limit. In the case of option 2, the accumulated corpus will continue to earn interest as decided each financial year and one withdrawal per year for any amount can be made. No further contributions are possible.

In the case of option 3, 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 year period.

Now, there is no difference in the interest rate or tax treatment between opening a new PPF account after maturity or extending it for five-year blocks. Fresh contributions, in either case, will earn the interest rate applicable for each quarter.

So the consideration is primarily about the accumulated corpus. One can think of two use-cases:

• Investor starting PPF for retirement; 15 years are up. Less than 15 years remaining to retirement: Retain old PPF account by extending for five years. Redemptions can be made to align asset allocation with future cashflow needs.
• Investor starting PPF for retirement; 15 years are up; 15 financial years or more available before retirement.
  • You can keep extending for five years if your retirement planning and asset allocation is already in place. Redemptions can be made to reset the asset allocation.
  • If there is a huge disparity in asset allocation (that is too little equity), then you can consider closing the PPF account and opening a new one. The associated market risks should be kept in mind. Investors refuse to let go of the “benefits of PPF (or EPF)” but too much of it can result in a lower retirement corpus in future. As established before, a SIP in a gilt fund has the potential (not a guarantee) to beat PPF even after-tax: PPF vs Gilt mutual funds: Which has done better over 15 years?
• PPF is also used to accumulate for a child’s future. Suppose the account is in the child’s name with the parent as guardian. If the account was opened immediately upon the birth of the child, the maturity date would be a few years before graduation from school. In this case, even an extension without further contributions would do as the liquidity is maximum – the full amount can be withdrawn at any time. In this case, the PPF account should not be transferred to the child after she turns 18 as there is no benefit in doing so.
  • The account can also be extended with contributions to handle PG expenses or marriage.
• Some parent would like to extend the PPF with further contributions until the child turns 18 and then transfer the active account in their name. There is nothing wrong with this, but if 15 years can pass quickly, five years pass thrice as fast. The children will have to be responsible enough to extend every five years – which at the time of writing has to be done offline.
  • I would recommend closing the minor PPF account after it has run its course (pay for UG or PG etc.). The child can open a fresh PPF account when they start earning. This would give them a fresh 15Y to build a corpus from scratch and appreciate the power of compounding on their own. This would also allow them time to ‘grow up’ and not crib about the offline transaction if that is the case even then. There is a certain joy in watching the PPF account from zero to something grand even if the rates are lower in future: Worried about low PPF interest rate? Here is why it could drop further

In summary, the fate of a matured PPF account (as with all personal finance decisions) depends on our need and our appreciation of risks – either market linked risk or fixed income risk. An extension is not an obvious choice.