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Public Provident Fund or PPF is one of the most popular financial instruments for safe, risk-free and tax-free savings in India. Equipped with the Sovereign Guarantee of the Central Government, in this scheme, investors deposit a minimum of ₹ 500 and a maximum of ₹ 1.5 lakh every year for 15 consecutive years. But when this account matures after completing the mandatory lock-in period of 15 years, most of the account holders make a big mistake—they withdraw the entire fund in lump sum and transfer it to their savings account without thinking. Financial planners and tax experts believe that PPF is not just an ordinary savings account, but it is one of the few investment vehicles in the country that has ‘EEE’ (Exempt-Exempt-Exempt) status; That means the amount invested, the annual compound interest received on it and the entire fund received on maturity is 100% tax free. Therefore, instead of closing the account immediately on completion of 15 years, one should take the decision thoughtfully as per one’s financial goals. After maturity, under post office and bank rules, there are mainly three very smart options available to the account holder, whose proper use can increase your retirement fund manifold.
If you need a large amount of capital immediately to fulfill a major financial goal in your life—like a child’s higher education fees, wedding expenses, down payment to buy a new house or closing an expensive home loan—then you can close your PPF account completely after completion of 15 years. For this you have to go to the concerned bank or post office and fill Form C or the prescribed closure form. Along with this, the original copy of your PPF passbook and the canceled check of the bank account in which the money is to be withdrawn have to be attached. Once the process is complete, the principal amount and the accumulated interest for 15 years is directly transferred to your savings account. The biggest strength of this option is that you do not have to pay even a single rupee of income tax under Section 10(10D) of the Income Tax Act on the entire amount received. However, if you do not desperately need the money immediately, then you should avoid choosing this option because once the funds are withdrawn and lying in a normal bank account, they either get wasted or the interest earned on it becomes taxable.
This option proves to be most suitable for those who no longer have the scope to deposit additional money every year, but want to see their huge corpus built over 15 years grow in a safe and tax-free manner without any risk. Under PPF rules, if you do not submit any form or withdraw money within one year of 15 years of maturity, your account is automatically (in default mode) extended for the next 5 years ‘without contribution’ i.e. without fresh contribution. In this option, you do not have to deposit even a single new rupee from your pocket, yet your entire maturity fund continues to enjoy the prevailing interest rate declared by the government (currently 7.1% compounded annually). Not only this, during this period you also get this special discount that you can withdraw as much amount as you want in the form of Partial Withdrawal once in every financial year and tax-free interest continues to accrue uninterrupted on the remaining balance. It acts as a great tax-free pension tool for senior citizens after retirement.
This third option is considered to be the most powerful and beneficial for harnessing the true power of wealth creation and compounding. If your job or business is continuing and you can save regularly, you can top up your PPF account with fresh contributions in a block of next 5 years. A strict rule to avail this facility is that you must deposit it in the bank or post office within exactly one year from the date of maturity. Form H It is mandatory to fill it and submit it. If you deposit money in the account after 15 years without submitting Form H, then Railways or Bank will not pay any interest on that new money nor will it get tax exemption under Section 80C. After submitting Form H, you can continue to deposit ₹500 to ₹1.5 lakh every year, on which you will also get tax exemption under Section 80C and you will also get the huge benefit of compound interest on the old large corpus. In this way you can keep the account active throughout your life for unlimited blocks of 5 years each (up to 20 years, 25 years or 30 years).
When you choose a 5-year extension with new contribution (Form H), you continue to have the legal right to make partial withdrawals for emergencies. As per the rule, a maximum of 60 percent of the balance in your account at the beginning of the new extension block of 5 years can be withdrawn as and when required during that 5-year period. You can make this withdrawal in lump sum or in pieces every year. For example, if on completion of 15 years your fund was ₹ 40 lakh and you got it extended for 5 years by giving Form H, then in the next 5 years you can make partial withdrawal up to ₹ 24 lakh in total without any tax liability. However, keep in mind that after the maturity of 15 years, the facility of taking a new loan (Loan Against PPF) on the account ends completely; Only partial withdrawals are allowed during the extension period.
The real wealth creation in PPF starts after you cross the age of 15 years, because by then your principal amount has grown so much that the annual interest earned on it exceeds the annual installment of ₹ 1.5 lakh that you deposit. Suppose an investor deposits the maximum limit of ₹1.5 lakh every year, then after 15 years at an average interest rate of 7.1%, his total corpus would be around ₹40.68 lakh (of which ₹22.5 lakh is principal and ₹18.18 lakh is only interest). If he continues by filing Form H and extending it for only 5 more years to 20 years, his total fund increases to approximately ₹66.58 lakh. That means there is a huge increase of about ₹ 26 lakh in the fund in these 5 years. If this is continued for 25 years, the total corpus becomes a huge tax-free fund of ₹1.03 crore (over a full Rs 1 crore), in which the investor’s own investment is only ₹37.5 lakh and more than ₹65 lakh is generated only from tax-free government interest.
Which path to choose once PPF completes 15 years depends entirely on your immediate financial situation and age. If you have a big loan or want to fulfill a big dream of retirement immediately, it is advisable to withdraw the entire money. If you are retired and want to preserve your capital and spend it only when needed, then a 5-year extension without contribution is the best option where interest will continue to accrue and liquidity will also be maintained. On the other hand, if you still have 5 to 10 years left for retirement and have a regular source of income, then opt for extension with new investments by filling Form H so that you can ensure yourself a guaranteed and tax-free fund worth crores without risking a single penny in the stock market.