The PPF is a compelling financial instrument that often takes center stage in discussions about compounding and long-term investment. However, beyond the accumulation phase, PPF can also work as a pension tool, provided your PPF account has a substantial balance1.
How PPF Works for Regular Income:
Extension Feature: After the initial 15-year term, PPF account holders can extend their accounts in blocks of 5 years without any contribution limits. This extension feature is what makes PPF a reliable source of tax-free income post-retirement2.
Tax-Free Interest: When you exercise the option to extend your PPF account by five years (with or without contribution), your PPF balance continues to earn tax-free interest.
Annual Withdrawals: During the extension periods, you can make one withdrawal each year. For accounts extended without contribution, you can withdraw any amount from the PPF balance. For accounts extended with contributions, you can withdraw up to 60% of the account balance at the start of the extension period.
Understanding PPF Maturity Rules:
Three key aspects define the maturity of PPF. Firstly, PPF matures after 15 years, a point emphasized earlier. Secondly, post-maturity, the PPF account can be extended for the next five years, during which the subscriber need not make any contributions. Thirdly, after maturing the PPF account, contributions can be increased for the next five years.
Imagine you and your spouse diligently saving in PPF over the years. At the completion of the 15th year, assume both of you have accumulated Rs 40 lakh each in your PPF accounts. By extending the accounts and making annual withdrawals, you can create a steady flow of tax-free income during retirement.
Extending the Maturity Period:
PPF subscribers have the option to extend the maturity period of their accounts in blocks of five years, with no set limit. Consequently, by extending the maturity period multiple times, say in blocks of 5-5 years, the PPF account can be maintained for 20-25 years. This provision of extending the maturity period multiple times makes PPF a viable source of tax-free regular income post-retirement.
Utilizing PPF for Pension Income:
Consider a scenario where both you and your spouse have been regularly investing in PPF for several years. Upon completion of the 15-year term, let’s assume there’s a combined deposit of 40-40 lakh rupees in your and your spouse’s accounts. Since both accounts have completed 15 years, they can be extended for another five years.
Currently, the interest rate on PPF stands at 7.1%. You can withdraw 7% of the principal amount annually. This means you can withdraw up to 28 lakh rupees from each PPF account. Hence, by the end of the financial year, you can withdraw a total of 5.6 lakh rupees.
With the interest rate at 7.1%, the principal amount remains substantial. Withdrawals from PPF are tax-free, translating to tax-free income of 5.6 lakh rupees annually for both you and your spouse. This translates to approximately 46,000-47,000 rupees of tax-free pension income monthly, sufficient to meet the post-retirement needs of many individuals.
Conclusion:
Leveraging PPF for post-retirement regular income emerges as a prudent financial decision owing to its tax benefits and the option to extend the maturity period. By understanding and strategically utilizing the flexibility offered by PPF, individuals can secure a steady stream of tax-free income even after retirement.
