Know the liquidity of the PPF account by Premature Withdrawal, Loan & Closure


Know the liquidity of the PPF account by Premature Withdrawal, Loan & Closure


Do not leave yourself or your family unprotected against financial storms… Build up savings.  – Ezra Taft Benson

Covid has already affected the household & business finances and its impact is clearly visible. It has adversely impacted many due to premature deaths, reduction in packages, downfall in productivity, loss of employment, workplace absenteeism etc. At this time, planning, prioritizing spending, and using resources efficiently will be key to financial stability. Saving done earlier may be now available for immediate use if the need arises. One such option could be by liquidating some amount from PPF A/c. Let us know about it.

PPF operates on the E-E-E model of taxation whereby investment, accrual and withdrawal is 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 higher lock-in period of 15 years. This is not completely true.

PPF accounts can be closed before completion of a 15 years period in certain special cases. Such premature closure of account is permissible with 1% reduction in interest rate after completion of 5 years, under 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 production of supporting documents from competent medical authority.
(ii) Amount is required for higher education of the account holder or the minor account holder, on production of documents and fee bills in confirmation of admission in a recognized institute of higher education in India or abroad:

Apart from above, PPF account also offers a certain degree of liquidity by way of Loan or partial withdrawals facility.

Loan facility on PPF A/c:

Rule 10 of the PPF Scheme ensures loan facility to the taxpayers. Loan facility is available from the 3rd financial year. However, 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). Maximum amount of loan permissible cannot exceed 25% of 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 the loan in the FY 2021-22, 25% of the amount (inclusive of interest) as on 31.03.2020 would be permissible. For loan, application has to be done in Form D.

Repayment of loan and interest:

Loan amount has to be repaid in one or more monthly installment 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 principal amount of loan, interest has to be paid in not more than 2 monthly installments. Interest rate for loan is 2% p.a above the interest rate of 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 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:

Loan facility is not available after 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 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 a 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.

The financial impact of covid may continue for months to come. . Present scenario has reiterated the need for adopting financial discipline and the importance of saving for rainy days. Tough times never last, but tough people do. 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.

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