PPF Premature Closure Illustration

Published: June 21, 2016 at 6:51 am

The government has announced premature closure norms for PPF accounts. This includes a rather harsh retrospective penalty which is illustrated in this post.

The order was passed on 18th June 2016. Thanks to Basu(nivesh.com) for pointing this out.

When can a PPF account be closed prematurely?

In Feb. 2016, a circular said,

“Premature closure of PPF accounts shall be permitted in genuine cases, such as cases of serious ailment, higher education of children etc,. This shall be permitted with a penalty of 1% reduction in interest payable on the whole deposit and only for the accounts having completed five years from the date of opening.”

We assumed that this 1% would be applied on the balance before withdrawal like an exit load. However, the 18th June circular describes how exactly the penalty would be applied. Unfortunately, the official illustration has a mistake (image link).

PPF Investment Schedule

Using the Excel PPF Calculator and Tracker one can easily get a table of the PPF investment schedule. For an account opened on 1st Apr 2006, the investment schedule is shown below.

ppf-premature-closure-illustration-1

Premature closure is now permitted from the 6h financial year along with partial withdrawals.

PPF Premature Closure Illustration

Now for the above amount let us consider some investments (the same found in the circular).

ppf-premature-closure-illustration-2

The eligible* refers to premature closure eligibility. The outstanding balance as on 31st Mar 2016 is Rs. 14,420.74.

If we apply for a premature closure along with necessary proofs,  the applicable interest rate for each of the financial years from the date of opening  will be penalised by 1%(!!)

Then the resulting outstanding balance as on date of withdrawal will be paid and the account closed.

ppf-premature-closure-illustration-3

The post penalty interest in the above table from inception will be applied. The amount paid out wil be Rs. 13,716.99

A loss of Rs. 703.75. An exit load of 4.88%

Had the deposits been Rs.1.5 Lakh a year, the effective exit load would be 5.5% (a loss of 1.3 L)

Why so high? Is this because fresh investments are used to pay interest to old investors? Much like a Ponzi scheme and the government wants to discourage early exits?

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps