PPF premature account closure: A last ditch option in emergency

PPF, one of the most preferred savings option for working population, has undergone few changes with regards to premature account closure. Earlier too, even though premature closure was allowed, it was only in the instance of the death of the account holder. Now, the Finance Ministry has made a few amendments to this rule.

Changes made

Premature closure will now be allowed on two additional grounds - In case of medical emergency and higher education. The catch point here is that such account closure can happen only after the account has completed five financial years. However, this timeframe is not applicable in case of death of the accountholder.

According to the Finance Ministry notification, 'A subscriber shall be allowed premature closure of his account or account of a minor of whom he is the guardian on ground that amount is required for treatment of serious ailments or life-threatening diseases of the account holder, spouse or dependent children.' and if there is 'requirement for higher education of the account holder or the minor account holder in confirmation of admission in a recognised institution in India or abroad.'

Supporting Documents to be provided

Inorder for the money to be released, in case of ailments, the applicant has to provide supporting documents from competent medical authority detailing the ailment. When it comes to education, papers pertaining to confirmation of admission and fee bills should be provided as the supporting document.

Penalty levied

Notification mentions that 'Premature closure shall be subject to deduction of such amount which shall be equivalent to one percent less interest on the interest rate on the deposits held from the date of opening till the date of such premature closure.' This effectively means 1% would be deducted from the interest rate offered from each year, the account was active.

Reading the fine print

Even thought it reads as one percent, the actual effect on the money saved is quiet enormous. According to financial planner Basavaraj Tonagatti, "On back testing, the dent on your savings works to be around 4.8% and not 1% as perceived." Among the masses, it was generally perceived that 1% deduction is on the total savings, but in reality the loss is much more, which turns out to be a huge dampener.

There are other facilities available through which you can take out money from your PPF account. For example: if the requirement is within the first six years, then one can opt for a loan from PPF. The rule specifies that loan is made available only between the third and sixth financial year of opening the account. The interest rate charged is 2% more than the prevailing PPF interest rate and amount is restricted to 25% of the balance at the end of the second year proceeding the year in which the loan is applied. Remember, the facility is not available from seventh year onwards, as from the seventh year onwards one becomes eligible for  partial withdrawal. There is no penalty involved and the remaining amount continues to attract the prevalent interest rate.

Financial planners are of the view that premature withdrawal will cost you more for older accounts as for each year 1% will be deducted from the date of account opening to the closure of such account. The penalty will be much more than 1%. On the contrary, they recommend opting for partial withdrawal or taking a loan against PPF account, if the amount required is within the sum available in these options.