How to convert PPF into rolling 5-year deposit offering tax-free interest and tax saving

Anyone who has a Public Provident Fund (PPF) account knows that it is a long-term saving plan — 15 years to be precise. But what after 15 years? Well, that’s when the magic begins! After the initial period of 15 years is over, you can keep on extending the deposit for a period of five years at a time.

You need not start a fresh PPF account and continue it for all of 15 years: Just extend the old one for five years at a time, indefinitely. The option of extension of account shall be made by the account holder before expiry of one year from the maturity of the account. This way, the same PPF account offers additional liquidity to what is offered during the initial term.

Overall, then, after the initial 15-year period, you can convert your PPF investment into a 5-year deposit that offers tax-free interest, tax saving under Section 80C of the Income Tax Act and immense liquidity and all this for your lifetime. Now, let us briefly examine the rules of extension.

Rules of extension

The PPF account can be continued (after the term of 15 years) either with or without further subscription. The rules for contribution to the extended account remain the same as during the 15-year period. Once the choice is made for a block of five years, it cannot be changed. The only thing that investors should be careful of is that once an account is continued without contribution for any year, the subscriber cannot change over to with-contributions extension.

The choice to extend the PPF account with subscription has to be made within one year from the maturity of the account. If this is not done, then by default the account is deemed to have been extended without further contribution for a period of five years.

Coming to liquidity, an investor, continuing his account with fresh subscriptions, can withdraw up to 60% of the balance to his credit at the commencement of each extended period in one or more instalment, but only one per year.

For example, say the term of your PPF account is ending on March 31, 2014. The balance at that time in the account is, say, Rs 15 lakh. Now, you may opt to continue the account for five more years (i.e. till March 31, 2019) and invest regularly as you have been.

However, over the period of five years till March 2019, you may withdraw only Rs 9 lakh which is 60% of the balance standing to your credit on March 31, 2014.

But, what if you wish to continue but not invest further? In other words, you may wish to earn the tax-free interest but may not wish to commit further funds. That, too, is possible.

In case the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year. The balance will continue to earn interest till it is completely withdrawn.

The investor has to submit Form H at the post office or bank where the account is held if he intends to continue with the subscription.

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