The A to Zee of PPF

July 13, 2000

PPF is not only one of the most popular investment options but also one where a layman has lots of questions unanswered. Even in the Questions answered by Mr. AN Shanbagh, on the same page, I have come across lots of questions relating to PPF. Let's dig into the PPF and unravel the PPF mystery.

Public Provident Fund, or PPF, to my mind is one the best tax saving scheme in India. And if you are in the high tax-paying bracket, it is the best fixed-income scheme also. This is a 15-year scheme and can be extended by 5 years at a time. It offers a 11 per cent interest rates (till January 2000, it was 12%) on the subscription, compounded on a yearly basis (11% tax-free interest is effectively 15.71% pre-tax interest If you are in the 34.5% bracket, the tax equivalent yield amounts to 16.79 per cent. It amounts to 14.10 per cent and 12.22 per cent, if you are in the 22 per cent or 10 per cent tax brackets. This means that if you want a similar return, you will have to scout for an investment that offers you these returns putting the risk factor at the forefront.

Any sum with a minimum of Rs 100 and maximum of Rs 60,000 can be contributed to the account in a lump sum or monthly installments. In the PPF scheme, not only is the principal non-taxable, the interest accrued to the saver is also completely tax-free. Under this scheme even premature withdrawals are non-taxable, since it is of the nature of capital receipt. The account can be opened at specified nationalised banks or post office. All salaried and non-salaried individuals, Hindu Undivided Family (HUF) and NRIs can invest in PPF. Only one account can be opened per individual/ HUF, joint accounts are not allowed. Contributions in the names of spouse and children qualify for the rebate, but the investment will be deemed as a gift.

It is difficult to find fixed-income instruments (at the same low risk level) that can yield you comparable returns! Moreover, an investment in the PPF is equivalent to the risk of lending to the government, and hence has the lowest level of default risk

In a way, both are competing investments, which offer a lump sum on maturity, an identical return of 11 per cent compounded annually, and a tax rebate. So what should be the determining factor? Tenure of the investment and tax on interest earned. Since interest earned on PPF is totally exempt from tax under Section 10 of the Income Tax Act, it scores over NSC where section 80L is applicable. That brings us to tenure. If you are looking at a short-term investment or if you are saving for a particular goal six or seven years down the road, then opt for NSC which has a maturity period of 6 years. If a long-term investment is what you have in mind, go in for the PPF. Fairly inconsistent with your savings? Opt for PPF. It will force you to keep some amount of money aside every year for 15 years (assuming that you go way above the minimum, which is as low as Rs 100). If you are a spendthrift, then maybe you should just go and buy yourself an NSC certificate before you spend the money (here, too, assuming you do so for an amount higher than the minimum Rs 100).

The rate of interest will be calculated on the lowest balance in the account between the close of the fifth day and the end of the month and will be credited to your account at the end of the year. So, to get the maximum out of your investment, deposit the amount in the first few days of the month.

Then you can opt either for a partial withdrawal (only one a year) or take a loan on your PPF account. A second loan can be taken only after the first is totally repaid. Individuals can avail of loan facility from the second to the fifth year at the rate of one per cent per annum, which effectively works out to 12% if repaid within 36 months, or else 6 per cent, thereafter.

No. You can take a loan only after two years from the end of year in which the initial subscription was made. A partial withdrawal is permissible only from the fifth year from the end of the year in which the initial subscription was made. For all practical purposes, it means from the seventh year onwards.

Up to 25 per cent of the balance to your credit at the end of the second year immediately preceding the year in which the loan is applied for

This type of situation is not a new situation. Every year, I hear lots of people grumbling about the shortage of funds. Thank your stars, if this situation arises after the seventh year (Pray and work in a direction, that this type of situation shouldn't arise to begin with). After the seventh year, you will have access to a part of your PPF, so even if you are short of money, you can use your existing money to pay for your PPF. In other words, it means, you don't need to keep any money aside for investing in PPF, because you can withdraw from your PPF and deposit the same money to your PPF. Individual have the facility to withdraw their money from the seventh year onward from the year that the account has been opened. The withdrawal amount is limited to 50 per cent of the amount deposited in the preceding four years from the date of withdrawal, or immediately preceding year, whichever is lower. Let us understand it more clearly. Say, if you are depositing 60,000 every year, as shown in table, and you require to withdraw after the end of seventh year, you can withdraw 50% of the balance to your credit four years back (50% of 313668.08= 156834.04)

Though it says 15 years, it actually works out to be a 16-year period since an individual is allowed to make his last contribution in the 16th financial year. Even if the contribution is made on the last day, the tax rebate still holds though no interest on the amount will be earned.

Sure, but at a block of five years. And, you can continue extending this in five-year blocks till it touches 30 years.

No. If you merely retain your balance, it will earn the 11 per cent as interest until withdrawal.

If you are just retaining the balance in your account, you can withdraw the entire sum in one or more installments at the commencement of each extended period. However, not more than once a year. If you have been continuing with fresh subscriptions, then you can withdraw up to 60 per cent of your balance at the commencement of each extended period in one or more installments, but not more than once a year.

Yes. The Central Board of Direct taxes has stipulated that after 15 years, the tax benefits under Section 88 will not accrue unless the option for continuance is exercised.

In addition under Section 88, PPF contributions (aggregated with your subscriptions to other schemes that qualify for Section 88 benefits), are eligible for a 20% tax-rebate up to a maximum of Rs 60,000 per annum.

(For authors, musicians, and the self-employed, the rebate is higher at 25%.)

Further, the withdrawn amount does not have to repaid nor any interest is payable on it. Since the tenure of the scheme is 15 years, it could become less attractive for someone over 50-55 years old. In order to make this scheme more attractive the government had set up a committee, which gave its recommendations. The recommendations include a higher interest rate and a 10 per cent tax on withdrawals. It remains to be seen whether these recommendations will be accepted in part or full.

BOX 1 Table	Source: FUNDZ.WEB.COM
Depositing Rs 60000 every year	Amount (Rs)
Amount you will get after 1st year	66600
Amount you will get after 2nd year	140526
Amount you will get after 3rd year	222583.86
Amount you will get after 4th year	313668.08
Amount you will get after 5th year	414771.57
Amount you will get after 6th year	526996.45
Amount you will get after 7th year	651566.06
Amount you will get after 8th year	789838.32
Amount you will get after 9th year	943320.54
Amount you will get after 10th year	1113685.80
Amount you will get after 11th year	1302791.23
Amount you will get after 12th year	1512698.27
Amount you will get after 13th year	1745695.08
Amount you will get after 14th year	2004321.54
Amount you will get after 15th year	2291396.91

Box 2 Tips

Source: Fundz.web.com