The change
According to this recent change, a PPF subscriber shall be allowed premature closure of her account or account of a minor of whom she is the guardian on grounds that the amount is required for treatment of serious ailments or life-threatening diseases of the account holder, spouse or dependent children on production of supporting documents from competent medical authority. Similarly, you will be able to prematurely close your PPF account for higher education needs only if you produce documents and fee bills showing confirmation of admission in a recognised institution in India or abroad. The premature withdrawal, however, comes with a penalty-you will get 1% less interest as applicable from time to time
Earlier you were not allowed to prematurely close your PPF account. You had to complete 15 years to close it. So, even if you left the account inactive, you could only get the money after 15 years. Earlier you could only do partial withdrawal from the seventh financial year onwards. For partial withdrawals, earlier the rule was capped at 50% of the total balance at the end of the fourth year, counting back from the year of withdrawal or 50% of the total balance at the end of the year before the year of withdrawal, whichever is lower. Withdrawals could be made only once in a financial year.
What you should know
PPF is a risk- and tax-free product and enjoys the exempt-exempt-exempt (EEE) tax status. This means the contribution, accumulation and withdrawal are all exempt from tax. You can invest a minimum of Rs.500 and a maximum Rs.1.5 lakh in one financial year and this entire Rs.1.5 lakh qualifies for deduction under section 80C of the Income-tax Act, 1961. The initial tenure is 15 years, with the option to extend for five years at a time after completion of this period. The returns are pegged to the average government securities (G-secs) yield. Hence, every year the return on your investment may vary. For this financial year, it is offering 8.1% per annum.
Since PPF is a long-term instrument, the interest on your account has more time to compound. Also, you can avail a loan on your PPF between the third and the sixth financial years. When you take a loan, the amount is restricted to 25% of the balance in your PPF. You can avail the loan at 2% higher than the PPF interest rate. The loan has to be repaid in 36 months.
PPF has the ability to generate real return thanks to its tax-free status. So, when it comes to PPF you need to stick to your asset allocation and use it as a tool to maximise your long-term debt investment.
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