Public Provident Fund is a very efficient tool for planning your long term needs. Exempted at all stages- Investments, Returns and Maturity, this instrument has been utilized by individuals primarily for children’s planning and retirement planning. Although, returns are no more fixed now, it still is a viable investment avenue for including in your financial planning.
All of us know the basic facts about PPF. The maximum limit has been increased to Rs 1 lakh which you can claim under section 80C. The interest has been linked to G-Sec of equivalent maturity and will be declared by government every year on 1st April. You can withdraw from this investment after 7th year and the amount of withdrawal is limited to 50% of the balance in your account at the end of the fourth year — immediately preceding the year in which the amount is to be withdrawn, or at the end of the preceding year, whichever is lower.
Here are some more facts about this instrument which are less known but highly advantageous in planning your financial future.
Extension of Account
This is one of the unknown magical feature of this instrument. Most people think that a PPF account is only for 15 years or can be extended for another 5 Years. But that’s not so. You can extend your PPF account in a block of 5 years, indefinitely. This means, if you have open a PPF account at age 25 you don’t need to open new account every 15 years but can continue the same account till age 60 when you intend to retire or beyond. During the extension period the account will continue to earn interest as notified by the government every year on 1st April. Post maturity you can consider it as 5 year term deposits which earn you tax free interest along with Sec 80 C benefit.
Following are the features of this investment during the extension period-
1. Contribution-You have option of extending the account either with contributions or without contributions. One important fact which investors need to know is that once you have opted for continuing the account without any subscription you cannot change it to with-contribution later.
2. Liquidity– Liquidity in a PPF account during extension period is very high as compared to 15 years horizon. If you are making fresh contributions then you can withdraw up to 60% of the balance at the commencement of each extended period in one or more installment, but only one per year is allowed. So if your balance in PPF account at completion of 15 years on March 2012 is Rs 20 lakh, you can withdraw up to Rs 12 lakh during the next five years of extension. But if you are not making any fresh contributions, any amount can be withdrawn without restrictions. However, only one withdrawal per year is permitted and the balance in your account will keep earning interest for the rest of the period.
3. When to Extend: You can make application within one year after the maturity of PPF account if wish to continue with subscriptions. In case you do not choose a option, by default, the account gets continued without any fresh subscriptions.
4. How to apply: You have to submit Form H at the branch where your account is held.
What Happens on Death?
In case of PPF, if the subscriber dies, the balance in the account is paid to the nominee or the successor. Although a nominee can opt for continuation of account and earn tax free interest, it’s not advisable since nominee cannot appoint a nominee. Also there are no partial withdrawals permitted in such cases. If there are joint nominees, then they will be treated as joint holders and joint rules will apply like joint signatures and joint bank account.
If there is no nomination in force, then the balance is paid to the legal heirs on producing succession certificate or probate. Balance up to Rs 1 lakh may be paid to legal heirs on production of (i) a letter of indemnity, (ii) an affidavit, (iii) a letter of disclaimer on affidavit, and (iv) a certificate of death of subscriber, on stamped paper, in the forms as in Annexure to Form G. The process may be cumbersome in country like India where obtaining succession certificate takes an enormous time, money & energy.
All these features are less known not only to investors but banks and post office staff where accounts are opened. There are many instances where due to lack of awareness bank/PO staff refused to extend the account and insist on a new one after 15 years completion. But your awareness can lead to utilizing the maximum benefit of your PPF account.
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