PPF operates on the E-E-E model of taxation whereby investment, accrual, and withdrawal are fully exempt from tax. Though one of the best tax-saving instruments, people often complain that the Public Provident Fund (PPF) investment lacks liquidity due to a higher lock-in period of 15 years. This is not completely true.
PPF accounts can be closed before the completion of a 15 years period in certain special cases. Such premature closure of account is permissible with a 1% reduction in interest rate after completion of 5 years, under the following circumstances:
(i) Amount is required for the treatment of serious ailments or life-threatening diseases of the account holder, spouse or dependent children or parents, on the production of supporting documents from a competent medical authority.
(ii) Amount is required for higher education of the account holder or the minor account holder, on the production of documents and fee bills in confirmation of admission in a recognized institute of higher education in India or abroad:
Apart from the above, the PPF account also offers a certain degree of liquidity by way of a Loan or partial withdrawals facility.
Loan facility on PPF A/c: Rule 10 of the PPF Scheme ensures loan facilities to the taxpayers. The loan facility is available from the 3rd financial year. However, the loan facility cannot be availed after the completion of 5 years from the end of the year in which the account was opened. (After completion of 5 years, partial withdrawal facility can be availed). The maximum amount of loan permissible cannot exceed 25% of the amount as standing in the account at the end of the 2nd year immediately preceding the year in which the loan is to be applied for. To simplify, if anyone wants to avail of the loan in the FY 2021-22, 25% of the amount (inclusive of interest) as of 31.03.2020 would be permissible. For a loan, the application has to be done in Form D.Repayment of loan and interest:The loan amount has to be repaid in one or more monthly installments within a period of 36 months from the first day of the month following the month in which the loan is sanctioned. After the repayment of the principal amount of the loan, interest has to be paid in not more than 2 monthly installments. The interest rate for the loan is 2% p.a above the interest rate of the PPF Account. However, if the loan is not repaid within a period of 36 months then interest on the amount of loan outstanding shall be charged @ 6% above instead of a concessional rate of 2% p.a. from the month following the month in which the loan was obtained to the last day of the month in which the loan is finally repaid.
Partial Withdrawals from PPF A/c:The loan facility is not available after the completion of 5 years period. In such a case, Rule 9 of the PPF rules allows partial withdrawals from the account without losing any tax benefit. Withdrawal (in Form C) is permitted at any time after the expiry of 5 years from the end of the year in which the initial subscription was made. Maximum withdrawals permissible is up to 50% of the amount standing (a) at the end of the fourth year immediately preceding the year of withdrawal or (b) at the end of the preceding year, whichever is lower. This 50% amount would further be reduced by the amount of loan, if any, availed & remained unpaid by the depositor. Note that only one withdrawal is permissible in any one year. In case the PPF account is extended for a further period of 5 years by the depositor after completion of 15 years period, then the withdrawal is permissible up to 60% of the balance at his credit at the end of 15 years period.
Better planning and proper financial management will help in navigating through the tough times as long as they last. Financial wellness along with physical and mental wellness will help us sail through this uncertain phase with minimal disruption.