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If you invest in Public Provident Fund (PPF) for safe and better returns, then generally there is a perception that this money is completely blocked for 15 years. Many times a sudden medical emergency, children’s career milestone or some big household expense comes up in life, where the need for immediate cash is felt. At such a time, most people start thinking of taking an expensive personal loan from the bank or mortgaging their gold jewellery. Very few investors are aware that under the Public Provident Fund Scheme rules of the Government of India, account holders can legally withdraw their money even before the completion of the 15-year period.
The operating rules of PPF accounts operated in post offices and all major government and private banks of the country are very transparent. Under the provisions decided by the Finance Ministry, three special arrangements have been given to investors to provide liquidity i.e. funds as per their need. These include the option of partial withdrawal, cheap loan against account and premature closure of the account in extreme circumstances. If you are also unaware of these rules of PPF, then by understanding these easy methods you can make your financial planning even stronger.
The safest and most beneficial deal for account holders investing in Public Provident Fund is the partial withdrawal facility. As per government rules, you become eligible for partial withdrawal once you complete five financial years after the end of the financial year in which you opened your PPF account. This simply means that as soon as the seventh financial year starts, you can withdraw a large part of the amount deposited in your account. The most important thing about this withdrawal is that no penalty or interest rate is deducted on it and this money reaches your hand completely tax-free.
There is a clear mathematical formula for determining the maximum limit for partial withdrawal. The account holder can withdraw up to a maximum of 50 per cent of the balance at the end of the financial year immediately preceding the financial year in which the application is made, or the balance at the end of four years before the current year – whichever is lower. For example, if you need money for children’s school fees or a small project, there is no need to break the entire account. You can use this facility once in a financial year and the remaining amount will continue to receive government interest as before.
If a family suddenly faces a major financial crisis and 50 percent of the partial withdrawal amount is not enough, then the government also allows premature closure of the account. Under the Public Provident Fund Scheme, after the account remains active for five financial years, it can be closed permanently and all the money can be withdrawn along with interest. However, this facility is not given for normal expenses but only in three special and serious circumstances.
The first ground is that the account holder, his spouse, dependent children or parents have a serious or life-threatening illness. To meet the heavy medical expenses, the account can be closed on the basis of a certificate from the medical authority. The second basis is the expense of higher education, in which relief is available on production of documents of admission of the account holder or his children for higher studies in a recognized institution in India or abroad. The third ground is change in the residential status of the account holder, i.e. if a person becomes an NRI then he can get his account closed. A small condition for premature closure of account is that a nominal deduction of 1 percent is made on the total interest earned from the date of account opening till the date of closure.
Even if your PPF account has not completed five or six years and you are not eligible for partial withdrawal, you do not need to worry. The government provides excellent loan facilities to the account holders in the initial years. This loan facility is available from the end of the third financial year to the end of the sixth financial year. Compared to expensive personal loans available in the market, this is a very economical option because there is neither any lengthy paperwork nor heavy interest to be paid.
The interest rate on loan against PPF is only 1 percent more than the then prevailing PPF interest rate. That means, if the current interest rate on PPF is 7.1 percent, then you get a loan at only 8.1 percent annual interest. The loan amount can be up to a maximum of 25 percent of the closing balance of the financial year immediately preceding two years of the year of application. The principal amount of this loan can be repaid in easy installments within 36 months. Interest is recovered only after the principal amount is repaid, due to which there is no lump sum financial burden on the investor and the account also continues to run smoothly.
Withdrawal of money from PPF is no longer as complicated as before. If your account is in banks like State Bank of India, Punjab National Bank, Bank of Baroda, HDFC, ICICI and your net banking is active, then many banks are providing the facility of online application for partial withdrawal on their portal itself. For this, you have to login to net banking and go to the PPF Services section, fill the form and enter the necessary information and after OTP verification, the sanctioned amount is transferred directly to your savings account.
In post offices or banks where online withdrawal facility is not available, the account holder has to visit the concerned home branch and fill a simple form. For partial withdrawal, Form-C (or Form-2 in the new format) has to be filled. Along with this, photocopy of PPF passbook and original passbook have to be shown for verification. If you are closing the entire account on the grounds of illness or studies, it is mandatory to attach the hospital bill, doctor’s prescription, college allotment letter or fee receipt along with the form. After checking the documents, the bank or post office officials deposit the entire amount in the account holder’s savings account within a few working days.
The biggest USP of PPF is its exempt-exempt-exempt i.e. Triple E (EEE) tax status. This simply means that the amount deposited in it gets tax exemption under Section 80C, the interest added every year is completely tax-free and there is no income tax on the entire amount withdrawn after 15 years or through partial withdrawal. So when you make a partial withdrawal in the seventh year, you do not have to pay a single rupee as tax on that amount, which makes it much more beneficial than any fixed deposit or other savings scheme.
However, investors are advised to avoid withdrawing PPF funds unless there is a pressing compulsion. The compounding interest on PPF creates a huge corpus in the long run. If you withdraw a large amount midway, the fund you get at final maturity gets reduced significantly. Therefore, consider the loan option first, make partial withdrawals only if the loan does not work and take the decision to permanently close the account only as a last resort.