New PPF rules you should be aware of

In exercise of the powers conferred by section 3A of the Government Savings Promotion Act, 1873 (5 of 1873), the Union Government via a notification dated December 12, 2019, has replaced the Public Provident Fund Scheme (PPF), 1968 with Public Provident Fund Scheme, 2019. In its new avatar, PPF 2.0, while retaining most of the features of the old scheme has made a few changes. Let us try to demystify each of them.

Premature closure of account

While the tenure of a PPF account is 15 years, an account holder is allowed premature closure of his account, a minor’s account or the account of a person of unsound mind of who he is the guardian on any of the following grounds, namely,

1. Treatment of any life-threatening disease that either the account holder, his wife, parents or dependent children are suffering from on production of supporting documents and medical reports

2. for the higher education of account holder or his dependent children on the production of required documents

3. Change in his residency status on the production of a copy of Passport and visa or Income tax return

provided that an account is not closed before the expiry of five years from the end of the year in which the account was opened.

While the account holder could close the account on the first two grounds under the old rules, he can now close the account if there is a change in his residency.

In all the above situations the account holder has to submit an application in Form-5 (Even the forms have been changed from alphabets to numbers and are numbered as Form 1, 2 3, 4 and so on) Incidentally joint account cannot be opened under the scheme.

Continuation of account with or without deposits after maturity

The objective of PPF is to channelise the savings of the public and provide them with a corpus either after retirement or for an emergency. PPF, therefore, has a tenure of 15 years. However, an account holder has the option to extend the account after maturity. If he chooses to extend it, he has to do it in blocks of 5 years. This extension can be done any number of times. The request for extension of account has to be made within one year from the date of maturity of the account. While there is no change in these provisions, the old rules were silent on whether the account holder could continue the account without making further contributions. The new rules have cleared this ambiguity. The new rules specify that when an account holder opts to extend the account beyond maturity without making any deposits, then he will not have the option to make further deposits thereafter. However, balance in such an account will continue to earn interest applicable to the scheme.

Restriction on the number of deposits in a financial year

PPF rules of 1968 restricted the number of deposits to 12 times in a financial year. The new rule has removed this restriction. It only states that the “minimum deposit will be five hundred rupees and maximum Rupees one lakh fifty thousand rupees in a financial year”. An account holder can open the account with a minimum initial deposit of five hundred rupees and deposit any sum in multiples of fifty rupees thereafter subject of course with the ceiling of Rs1.50 lakhs. The account holder can contribute either in a lump sum or in instalments and can claim benefits under Section 80C of Income Tax Act.

Interest on loan taken in PPF account

The PPF rules permit an account holder to take a loan on the balance in his PPF account from the third financial year till the sixth financial year. Under the new rules, the interest rate is reduced to 1% above the prevailing PPF interest rate from 2% earlier. So if the prevailing interest rate is 7.90%, the interest rate on the loan will be 8.90%. It further states that after repaying the principal amount (to be repaid in 36 months) the account holder has to pay the interest in two monthly instalments. Interest will be charged for the period commencing from the first day of the month following the month in which the loan is drawn up to the last day of the month in which the last instalment of the loan is repaid.

After these changes, and as PPF comes in the triple E category (Exempt, Exempt, Exempt) it becomes even more attractive as a savings instrument. The best part of the PPF account, which is also its USP, is the fact that balance in the account cannot be attached by any court order or decree in respect of any debt incurred by the account holder.

(The writer is a CFA and a former banker and currently works with Manipal Academy of Banking, Bangalore)