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).
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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 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.
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