The genesis of this article arose when we found that one of our close family friends, a sixty-year old gentleman, was about to open a fresh PPF account as his old one had matured.

Obviously he was aware of the long-term of PPF as well as the initial lock in – however, he thought he had no option. Till of course we introduced him to how upon maturity, if need be, the same PPF can indeed be converted into a five year fixed deposit! Read on to know more.

 Public Provident Fund (PPF) as a savings instrument needs no fresh introduction — it’s already very popular with the salaried as well as the business community alike.

  In fact, past columns have covered this subject, however, reader feedback on a specific issue necessitates the topic to be revisited.

Basically, the popularity of PPF comes as no surprise — Over 20 years, an annual contribution of Rs. 1,50,000 could grow to over Rs. 68 lakh which is almost 45 times the annual investment –

(of course, the aforesaid calculation assumes a PPF interest rate of 7.9% p.a. Actually this rate is not constant but variable and subject to change every quarter.) Anyhow, the assumption gives us a broad idea about the potential of PPF. And this capital built over time can serve multiple purposes like catering to the education of children, medical emergencies and even retirement.

 Readers would have noticed that we have mentioned that the capital grows to a substantial sum over twenty years. But isn’t PPF a fifteen year scheme? Yes, it is, however, after the initial period of fifteen years is over, one can keep on extending the deposit for a period of five years at a time. In fact, this is where the magic of PPF truly begins. One need not start a fresh PPF account and continue it for all of fifteen long years — just extend the old one for five years at a time indefinitely! This way, the same PPF account can be converted into a five-year deposit and what’s more — this comes with additional liquidity than what is offered during the initial term. So basically, you can convert your PPF investment into a 5-year deposit that offers tax-free interest, tax saving under Sec. 80C and immense liquidity — and all this for your lifetime.

Now, let’s briefly examine the rules of extension.

The PPF account can be continued (after the term of 15 years) either with or without further subscriptions. The only thing that investors should be careful of is that once an account is continued without contributions for any year, the subscriber cannot change over to with-contributions extension. [Notification F.3(6)-PD/86 dt 20.8.86].

Coming to the liquidity. An investor, continuing his account with fresh subscriptions, can withdraw up to 60% of the balance to his credit at the commencement of each extended period in one or more installments, but only one per year. (Notification F.7/2/97-NS IIdt. 9.2.1998)

For example, say the term of your PPF account is ending on 31st of March 2015. The balance at that time in the account is say Rs. 15 lakh. Now, you may opt to continue the account for five more years (i.e. till 31st of March 2020) and invest regularly as you have been. However, over the period of five years till March 2020, you may withdraw only Rs. 9 lakh which is 60% of the balance standing to your credit on 31st of March 2015.

But what if you wish to continue but not invest further? In other words, you may wish to earn the tax-free interest but may not wish to commit further funds. That too is possible. In case the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year. The balance will continue to earn interest till it is completely withdrawn. (Clarification 7 to Clause 9(3A) of the PPF Scheme, 1968)

Even NRIs can invest in PPF, provided the PPF account had been opened before the person became an NRI. In other words, as per Notification (GSR 585(E) dt 25.7.03), though NRIs are prohibited from opening a fresh PPF account, however, if a resident who subsequently becomes NRI during the currency of its term or an NRI who has opened the account before the date of this notification may continue to subscribe till maturity on a non-repatriation basis.

This means, NRIs cannot open a new account or extend the scheme beyond its maturity. Such accounts opened by mistake after the respective dates of notifications shall be treated as void ab initio. As and when (and if) the error comes to light, the account shall be closed and the amount refunded to the depositor without any interest.

We were under the impression that these are aspects of PPF that are not commonly known amongst investors. However, turns out that some bank branches too aren’t fully aware of these rules. Several readers have written in complaining that their bank has flatly refused to extend the account and instead wants the investor to close the existing account and start a fresh one. Yet another reader points out that his bank has specified that an extension will be allowed only for two blocks of five years each. After that the account will have to be closed. And in another case, the bank official specifies that post fifteen years, 60% of the closing balance may indeed be withdrawn but this has to be done at one shot — more than one installment will not be allowed. Yet another bank dictates that withdrawal after maturity has to be done in a similar fashion as it was being done during the tenure of the scheme. NRIs too aren’t spared. If the subscriptions are done through an NRO cheque, some bank officials refuse to accept the same citing the reason that PPF isn’t open to NRIs.

There are several more similar complaints, however space constraints preclude listing all of them.

Of course, when you show them the rule book, the issue does get resolved, however, it is felt that given the popularity and demand for the instrument, some training in PPF rules will prevent valuable time of both the depositors as well as the concerned bank from being wasted.

The authors may be contacted at

wonderlandconsultants@yahoo.com

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