When Your PPF Account Works Like A 5-Year Bank Fixed Deposit (FD)

Public provident fund account, or PPF, which has a maturity period of 15 years, is one of the most popular savings scheme in India. PPF enjoys the benefit of EEE (exempt-exempt-exempt) status in terms of tax implication. Contribution up to Rs 1.5 lakh in a financial year (under Section 80C), interest earned and maturity proceeds are tax free. After maturity period of 15 years, a PPF account can be extended in blocks of five years, with or without making further contributions.

Financial planners say that if there is no immediate fund requirement, one should extend the PPF account beyond 15 years. "After the 15 years initial block, it is better to extend the PPF account," says Ramalingam K, director and chief financial planner at Chennai-based Holistic Investment Planners (www.holisticinvestment.in). "There is no need to contribute and also he/she can withdraw once in a year."

A PPF account holder can make partial withdrawals even during the extended period. Withdrawals from PPF account are not taxable. In case the PPF account holder has opted for the without-contribution mode for the extended period, any amount can be withdrawn. But only one withdrawal from PPF is allowed per year.

PPF accounts currently fetch an interest rate of 7.6 per cent. "It (PPF) is yielding 7.6 per cent tax-free - which is better than bank fixed deposit or FD rates. Even senior citizen FD rates are lesser than this. So instead of closing it, you can extend it," adds Mr Ramalingam.

Even if a PPF investor needs money, Mr Ramalingam suggests, it is better to withdraw from your bank fixed deposits which are yielding less than PPF.

"Extension of PPF account is attractive - considering its slightly higher rate of return - regardless of your tax bracket. Even if you come under zero tax bracket, PPF extension is attractive," he adds.

The interest income from bank fixed deposit or bank recurring deposit is fully taxable.