Should I close my PPF account after maturity or extend it?

Published: September 22, 2020 at 10:40 am

I received an unusual question from a reader that said, “my ppf account is nearing maturity. should I close it and invest the amount into equity to correct my asset allocation close to where it should be? Or should I extend the ppf for another five years?”. Unusual because most investors would never think of doing this and prefer the safety and tax-free comfort of PPF. A discussion on what should be done with PPF accounts nearing maturity (completion of 15 financial years).

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! (2) Keep the account open without further contributions. (3) Extend the account for 5 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 retirement corpus) then converting the minor account to a major account is an option to consider.

In this case, the child will start her career with a PPF account that has a lock-in of five years only and can be extended for a similar duration for life. It will also have much better liquidity than starting a new account (see below).

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 keep withdrawing without contributions, soon the corpus would 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 year period. This is the key difference between option (2) and (3) aside from the contributions.

I was recently informed on Twitter that some banks do not approve of repeated PPF extensions and prefer a fresh account opened. The PPF rule book is clear that unlimited extensions of five-year blocks 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.

However, the line “to be exercised before the expiry of the first year of every extended block period” is confusing. My understanding is that refers to partial withdrawals (up to 60%) referenced above.  Another possibility is that it refers to further extensions – 20+5, 25+5 years but this does not make much sense.

Also, we can exercise the option (2) after exercising the option (3) for any no 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.

To answer the question posed, “Should I close my PPF account after maturity or extend it?”, if you do not need the money for spending for the next five financial years, then extending the PPF account would be a wise choice.  If your asset allocation 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 has to be done after the appreciation of rules and limitations. When dealing with banks, it is best to assume they are not aware of the rules and to keep the rule book handy.

Sign up for a new course on How to get people to pay for your skills! This discusses a simple framework for consistently growing your business with online visibility! Suitable for passive income seekers, small business owners and bloggers. Use this form to sign up for 60% early bird discount! You will be intimated upon launch.

Do share if you found this useful

Did you know? We have more than 900+ videos on YouTube to explore! Join our YouTube Community!

Use our Robo-advisory Excel Template for a start-to-finish financial plan!

Join our courses in exclusive Facebook Groups!

  • 500+ members are now part of our new course, How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner wanting more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills, building a community that trusts you and pays you!
  • 1822 members have signed for Goal-based portfolio management (watch 1st lecture for free). This is an online course to reduce fear, uncertainty and doubt while investing for a financial goal. Learn how to plan for your goals before and after retirement with confidence.

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!
We publish mutual fund screeners and momentum, low volatility stock screeners on a monthly basis
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, IIST Alumni 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