Opt for PPF extension if you are in the highest tax bracket, here's why

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A Public Provident Fund (PPF) account has a tenure of 15 years. After accumulating for such a long period, the money that you get on maturity is likely to be high. Hence due thought should be given to extending the account or withdrawing from it. 

The 15-year tenure for your PPF account doesn’t start as soon as you begin investing. The maturity date is calculated from the end of the financial year in which you make the first deposit. If you started investing from May 24, 2010, the maturity date will be April 1, 2026, as the tenure calculation will be done from March 31, 2011.

What are your options once the PPF account matures? The first is to extend the account by five years. Such extensions by five years can be done an infinite number of times. An investor can extend his account with contributions or without, that is, he can stay invested with only the investments made until maturity. But once an account is extended without a deposit for a year, the investor cannot put money in that block of five years. The account will continue to earn tax-free interest even if the extension is made without any contribution. "If you have sufficient cash flows, then the account should be extended upon maturity as the post-tax return from PPF is attractive, especially for investors in the higher tax brackets," says Vishal Dhawan, founder and CEO, Plan Ahead Wealth Advisors.

To extend an account after the original 15-year period, fill up Form H and submit it at your bank or post office. If an investor keeps depositing money after the end of the 15-year cycle without filling up this form, his investments will not be considered regular deposits and interest will not be paid on them. If you go to withdraw money without filling up Form H, you will only receive interest on investment made during initial 15 years. Also, tax benefits under Section 80C of Income Tax Act will not be applicable on deposits made after 15 years.

In the initial 15-year period, partial withdrawals are available from the sixth year onward. If an investor has opted for extension with contribution, partial withdrawal can be made once a year during the five-year block by applying through Form C. Total withdrawal of up to 60 per cent of the balance can be made during the five-year extension.

If an investor has opted for extension of his PPF account without contribution, he is eligible to withdraw any amount. The remaining funds continue to earn interest. A PPF account can also be closed but only at the end of the 15-year cycle.

Proceeds from a PPF account on expiry of the first 15-year period can be used to pay off existing debts, depending on an investor's age and financial situation. "If you have five to ten years until retirement, and have interest-bearing loans such as education or home loan, it is better to pay them off with the matured PPF money," says Deepesh Raghaw, founder, PersonalFinancePlan.in.

PPF money can also be used to invest in high-yielding assets like equities, depending on the investor's financial situation. “Many investors use the PPF money at maturity to build a retirement corpus. Based on an asset allocation that suits you, invest part of the money in equity mutual funds,” says Anil Rego, founder and CEO, Right Horizons. If one has less than four to five years to invest, then equities should be avoided.

Withdrawal Limits
  • Between 7 and 15 years: 50% of the 3rd year closing amount
  • On maturity (after 15 years): 100%
  • Extension without contribution: 100%
  • Extension with contribution: Up to 60%*
*Cumulative withdrawals between year 16 and year 20