While the Public Provident Fund (PPF) has lost some of its sheen over the years as interest rates have slipped gradually — 7.1% at present — several investors still prefer it given the tax benefits it offers, the safety of government backing and stability as a debt investment.
Although the PPF has a 15-year maturity, there are rules and conditions for the withdrawal of funds from the account before maturity.
Loans against PPF
To be eligible for a loan against PPF, you need to wait for the completion of one full financial year from the end of the financial year in which the account was opened. Effectively, you can take a loan against PPF from the beginning of third financial year.
The limit for a loan is 25% of the balance at the end of second preceding financial year from the year in which the loan application is made. So, if you plan to take a loan on 31 March 2025, the limit would be 25% of the balance at the end of 31 March 2023.
The loan window is available only for five financial years from the end of the year in which you opened the account. After this, you don’t need a loan because partial withdrawals can be made from your PPF account. More on that later.
On the loan front, the interest rate charged is the PPF rate + 1%.
The loan can be repaid within 36 months. After the principal is fully paid (in instalments or as a lumpsum), the borrower can pay the remaining interest in not more than two instalments.
If the loan is not repaid within 36 months, the interest rate is revised to the PPF rate + 6%. If the principal is repaid within 36 months and interest is still due, the outstanding interest can be recovered from the PPF account.
You will need to submit Form 2 at your branch to avail of the loan facility.
Withdrawals
You can withdraw from the PPF account after the completion of five full financial years from the end of the financial year in which the account was opened. The maximum you can withdraw is the lower of the following: 50% of the balance at the end of preceding year (from the year of withdrawal) or 50% of the balance at the end of the fourth preceding year.
Let’s look at an example. If you plan to withdraw on 31 March 2025, the preceding year’s ending balance (on 31 March 2024) and the fourth preceding year’s ending balance (on 31 March 2021) will be considered.
Assuming it is ₹5 lakh in the preceding year and ₹4 lakh in the fourth year, the lower of both the balances will be your limit. In this case, it will be ₹2 lakh.
This partial withdrawal facility can be availed once every financial year. There will be no tax implications on these withdrawals. You need to submit Form 2 at your branch to make partial withdrawals.
On maturity
On maturity at 15 years, the PPF account holder has the option of extending the account in blocks of five years each — either with contribution or without contribution.
If the account holder decides to do so without a contribution, any amount can be withdrawn, without any ceiling. However, only one such withdrawal can be made in a financial year.
“If the account holder decides to extend the account with contribution, the maximum withdrawal limit is 60% of the opening balance at the start of the extended five-year period,” said Balwant Jain, a tax and investment expert.
In both cases, interest will be credited at the prevailing PPF rate.
Premature closure
The PPF account can be closed prematurely in special circumstances such as for the treatment of a life-threatening disease of self, spouse or dependants, higher education of self or dependent children or change of residency status. However, the account holder must complete at least five financial years from the end of the financial year in which the account was opened.
Premature closure will attract a penalty. This would result in 1% per annum deduction from the prevailing PPF interest rate. Accordingly, the final amount will be adjusted.
“However, there is no reversal of tax benefits on premature closure,” pointed out Parizad Sirwala, partner at KPMG.
You need to submit Form 5 for premature closure.
On the death of the account holder, the five-year waiting period doesn’t apply. The account can be closed prematurely on an immediate basis.
“The 1% penal deduction will also not apply in such cases,” Jain said.
