PPF is the wonderful debt product, which also provides the best tax benefits. But earlier there were some limitations on premature closure of PPF account. Now they are modified. Let us see those changes.
What is Public Provident Fund (PPF) Account?
I wrote a complete and detailed features about this wonderful debt product in my earlier posts. Please refer the links for the same.
Now in this post, I am trying to concentrate on the premature closure of PPF account before completion of 15 years. These changes will be effective from 18th June, 2016.
What was the earlier premature closure of PPF account rules?
Earlier PPF account will be allowed to close in the event of the death of account holder. His/her nominee will be allowed to close the account. Other than this, there is no option for an account holder to close the account.
He has to wait until maturity to close the account. This feels somewhat illiquid, even though there are options like loan and withdrawal after certain years.
What are new rules for premature closure of PPF account ?
Now there are three options to close the account. I try to list them as below.
Along with that, please note below points for understanding more of the premature close of PPF account rules.
# You are allowed to close the account before maturity if the account is completed 5 years. This rule is not applicable to death of account holder.
# Regarding amount required for treatment of serious ailments or life-threatening diseases, you must produce the supporting documents from the competent medical authority.
# Regarding amount required for higher education, you must produce the documents of fee bills in confirmation of admission in a recognized institute of higher education in India or ABROAD.
# In case of premature closure of PPF account, the interest payable to such accounts will be less than 1% of regular account from the date of account opening to the closure of such account.
Let me explain the same with an illustration given in notification itself.
- Notice the maturity amount after the FY 2015-16 (which I marked in red), it is Rs.14,421.19.
- Notice the interest rate change of 1% in case you apply for premature closure of PPF account, it is 1% less than the regular PPF account from beginning of your account to till the year you apply for closure. I marked the interest rate in red.
- Finally, notice the maturity amount after the FY 2015-16 (which I marked in red), it is Rs.13,716.69.
- Notice the maturity difference between two cases, it is Rs.704.50.
- The penalty of 4.8% but not the 1% as defined in a notification. So penalty of premature closure of PPF account is not 1%, but in real it is more.
- The effect will be higher for the older account. It means, if you close the account immediately after 6th year, then the penalty may not me that much higher. However, if go for premature closure in the 10th, 12th or in 14th year, the penalty will grow higher and higher than the actual 1%. SO OLDER THE ACCOUNT, HIGHER THE PENALTY FOR YOU.
Hope you understood this penalty clause.
Any doubts on premature closure of PPF account new rules of 2016?
Note–Notification of New changes