Premature closure of PPF Account Before Maturity


Premature Closure of PPF Account: Rules And Amount Calculations

There are several tax-savings investment schemes available in India. Public Provident Fund or PPF is one such investment scheme which comes with multiple benefits. It is a debt-based savings scheme, which means that the money that you invest is reinvested mostly into debt instruments like government bonds and securities. Since the securities that the money is invested in are all debt instruments, the investment is extremely safe. Adding to the safety is the fact that the whole scheme is operated by Government of India.

Premature closure of PPF Account

Premature Closure of PPF Account

The PPF investments are designed to be long term investments. A PPF account comes with a 15-year lock-in period. This means that unless the PPF account completes its full tenure of 15 years, the account cannot be closed. If necessary, money can be partially withdrawn from the account only from the 7th year of account. Prior to that, loan facilities are available between 3rd year of the account and 6th year of the account.

Now one question that pops up is, “Is there absolutely no way in which a PPF account can be closed prematurely?”

A new notification was issued by the Government of India on June 18, 2016 wherein, conditions for premature closure of a PPF account were changed.

Let us take a look at the announcement from the Government of India:

Explanation for the latest rules of premature closure of PPF account

According to the new rules released by the Government of India, a subscriber will be allowed to prematurely close his or her PPF account only if the following conditions are met:

  • The subscriber dies suddenly before the account runs it full course or tenure. In such an event, the nominee(s) or legal heir(s) of the account holder can apply for account closure prematurely and withdraw the funds. (No Penalty in this for account closure)
  • In case the subscriber himself or herself want to close the PPF account prematurely, he or she can do so only if the money is required for the treatment of a life-threatening disease or a very serious ailment of any of the following people: the subscriber himself or herself, the spouse of the subscriber, dependent children of the subscriber or dependent parents of the subscriber.
  • In case the account is to be closed on medical grounds as mentioned above, proper documents from a competent medical authority is very important and mandatory. Failure to provide such documents will mean that the PPF closure application will not be accepted.
  • A PPF account can also be closed prematurely if the amount is required for covering the expenses of higher education. The higher education should be for the subscriber or for the minor on whose name the account has been opened.
  • If higher education is quoted as the reason for premature account closure application, it is mandatory to furnish the fee bills.
  • It will also be mandatory to provide the documents confirming the admission to a recognized college or university either in India or outside India.
  • Whether it is higher education or whether it is medical purpose, rules for premature closure of the account dictates that the account should have been operational for at least 5 years. If not, premature closure of the PPF account will not be allowed.
  • Premature account closure attracts a penalty of 1% being deducted from the interest earned on the deposits that have been made in the account. This penalty will be counted from the date when the account was first opened till the date on which the premature closure of the account was applied for.

How is the amount calculated in case a PPF account is prematurely closed?

As we said, there is a penalty of 1%, the total accrued balance will not be handed over to the subscriber in case of premature account closure. Some money will be deducted. How is this calculation made?

Let us offer a nice mathematical illustration that will help you to understand how this entire calculation will work out. For the purpose of this illustration, we will make a few assumptions. These assumptions are:

  • The account was opened in 2006 at the beginning of the financial year. That is on April 1, 2006.
  • The account stayed operational till the March 31, 2016, i.e. 10 years when the application for premature closure of the account was made.

So, how will the calculations be made? Let us take a look at the table below which will explain how the account will work and what amount will be handed over the subscriber.

Year Fiscal Year Opening Balance Deposit R/I Total Balace Penalty Applicable R/I Eligible Amount
0 ‘06-’07 0 10000 8.00% 10800 1.00% 7.00% 10700
1 ‘07-’08 10800 10000 8.00% 22464 1.00% 7.00% 22256
2 ‘08-’09 22464 10000 8.00% 35061.12 1.00% 7.00% 34736.48
3 ‘09-’10 35061.12 10000 8.00% 48666.01 1.00% 7.00% 48215.4
4 ‘10-’11 48666.01 10000 8.00% 63359.29 1.00% 7.00% 62772.63
5 ‘11-’12 63359.29 10000 8.00% 79228.03 1.00% 7.00% 78494.44
6 ‘12-’13 79228.03 10000 8.00% 96366.28 1.00% 7.00% 95474
7 ‘13-’14 96366.28 10000 8.00% 114875.58 1.00% 7.00% 113811.92
8 ‘14-’15 114875.58 10000 8.00% 134865.62 1.00% 7.00% 133616.87
9 ‘15-’16 134865.62 10000 8.00% 156454.87 1.00% 7.00% 155006.22

The actual balance that accrues in the account is INR 156454.87 but because of the penalty, the subscriber will be receiving INR 155006.22.

If you notice properly, you will see that the interest rate has been assumed to be 8% throughout and hence the interest rate applicable after penalty will be 7% throughout.

Also notice that the first fiscal year is denoted as Year 0. That’s when the PPF account was opened. From there, another Five years need to pass before the account becomes eligible for premature closure. So, according to the example above, premature closure of PPF account is possible only from 6th year, that’s fiscal year 2012-13. Depending on which fiscal year the account is closed, the amount that will be received will change.

That is pretty much everything about PPF account closure rules and amount calculation in case of premature closure. In case you  want to change the amounts in the table, consider using our excel which already has the formula applied to it. You can just change the amount and see the amount that you will receive.

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