PPF Account: Extension Versus Withdrawal on Maturity

The public provident fund (PPF) is a government-backed scheme that provides risk-free investment options. 

It provides 7.1% tax-free returns and is regarded under the exempt-exempt-exempt (EEE) category. This means there is tax exemption on investment, interest or return earned, and maturity proceeds.

The PPF scheme has a 15-year lock-in period. After the completion of this maturity period, an individual has the option to close the account and withdraw the entire proceeds. However, if an individual opts to close the account, they will be unable to reap the tax benefits that are associated with investing in the PPF scheme.

A few other options are to extend the PPF account with or without introducing fresh deposits. The extension of a PPF account is allowed in the block of five years and so on. This move is beneficial to investors who belong to the 30% tax bracket. 

An individual can also continue making contributions to the PPF account during the extension period. Under Section 80C of the Income-tax Act (ITA), 1961, any fresh deposits of up to Rs 1.5 lakh within a financial year in the extended PPF account would qualify for a tax deduction. Also, the interest income earned from PPF is also tax-free. Besides, it is compounded on a quarterly basis.

In addition, a partial liquidity option is offered to the extended PPF accounts. The depositors can withdraw up to 60% of the PPF balance amount, which is held at the time of account extension. However, this is subject to certain conditions. 

While taking into account the investment goal, existing PPF depositors who may not have any immediate monetary needs to address should consider extending their PPF account after the completion of the lock-in period of 15 years. 

As an additional option, an individual can also look forward to is putting the redeemed amount in a tax-free fixed deposit (FD) which can offer better returns than a PPF account as well as offer tax deduction benefits. This is absolutely fruitful in case an individual belongs to 0% tax bracket category. A few other fixed-income products that can offer higher than 7% per annum returns can be suitably considered.