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The safest way to retire

Niharika Bisaria

The Public Provident Fund (PPF) is a good investment option for all those who are looking for a secure investment with a reasonably high rate of interest. The PPF account earns you a compound interest of 12 per cent per annum, gives you tax rebate under Section 88, and interest income exemption under Section 10 of the Income Tax Act.

Section 88 of the Income Tax Act gives you tax rebate in some specified financial products. Usually, up to 20 per cent of the amount so invested is deducted from your overall tax liability. This means that if you invest Rs 60,000 in a PPF scheme, 20 per cent of that, which is Rs 12,000, will be deducted from the total tax which you pay. In case the investment is less than Rs 60,000, 20 per cent of that amount will be taken to arrive at the deductible amount.

Section 10 of the Income Tax Act states that income from certain investments be wholly exempt from taxes. Since the PPF scheme falls under this, income from a PPF account is totally tax-free. However, please remember that the interest is accumulated in the PPF account and not paid annually to the subscriber but paid on maturity.

A good time to open a PPF account is when you are unmarried and are in a position to save a little bit more. It can even be used as a gift option for a new born, who could use it after 15 years of age for supporting oneself. In fact gifting a PPF account to your child or your spouse makes greater sense now as from October 1, 1998 gift tax is no longer applicable. The income that is earned on each of these deposits is totally tax free.

You can invest up to a maximum of Rs 60,000 in a financial year. However, in case you are a part of an HUF (Hindu Undivided Family) which is also earning an income you can invest another Rs 60,000 and get tax free income on that as well.

You can pay Rs 60,000 at one go or you can pay in 12 instalments each year depending upon your own cash flow situation. The return that you get on a PPF investment is higher than what you get on any other investment currently. A 12 per cent tax-free works out to 17.15 per cent taxable if you fall under the 30 per cent tax bracket. The rate is even higher at 17.91 per cent if you fall under the highest tax category of 33 per cent. No bank deposit, RBI relief bond or UTI scheme will give you this kind of return.

Further, the investment is safe. Even a court decree or attachment cannot touch your PPF balance. It is your property and remains yours. However, the money you invest in a PPF account does not have too much liquidity as you cannot withdraw from your account before the completion of fifth year. From the sixth year onwards you can withdraw once every year, up to the fifteenth year. The amount of withdrawal however, cannot exceed 50 per cent of the balance at the end of the fourth preceding year or the year immediately preceding the year of withdrawal, in whichever year the amount is lower.

In case you avail of a loan against your PPF account, you need to deduct this amount too from your account while calculating the balance for withdrawing. You can avail of a loan in the third financial year from the end of the financial year in which the account was opened. This facility is available only before the expiry of 5 years from the year in which the account was opened. The amount of loan cannot exceed 25 per cent of the balance at the end of the first financial year. The interest payable on this loan is 1 per cent higher than the PPF account interest rate, currently 12 per cent.

In order to keep your account active you need to invest atleast Rs 100 each financial year. In case, you have forgotten to pay your account can be revived by paying a fee of Rs 10 for every year of default alongwith the subscription amount of Rs 100. You can open a PPF account in any Head Post Office or a branch of a State Bank of India or any designated nationalized bank.

The PPF investment is for a period of 15 years. However, you can extend the investment for a fresh block of 5 years at a time. Depending upon when you reach the age of 60 years, (when most of us need to fall back on our investments), you should plan your PPF investment. In case you decide to invest at 30, you will be getting the money at 45 years and you could then open another account which will mature at 60 years. The disadvantage with a PPF fund is that it is not a very attractive option for those above 60. However, at the age of 60, if you are in good health, you could still extend the investment for another 5 years. This will depend upon your liquidity requirements and whether there is any other instrument offering you these kind of returns.

The following table illustrates how an investment of Rs 60,000 each year into a PPF scheme will yield as much as Rs 25 lakhs at the end of 15 years.

GROWTH OF A 15 YEAR PPF ACCOUNT OF A MINOR CHILD (AGE 4 YEARS)
Year	Father's Gift	Mother's Gift	Interest (12 %)	Total at the end of the year
1	30,000	30,000	7200	67,200
2	30,000	30,000	15,264	142464
3	30,000	30,000	24,296	226760
4	30,000	30,000	34,411	321171
5	30,000	30,000	45,741	426911
6	30,000	30,000	58,429	545341
7	30,000	30,000	72,641	677982
8	30,000	30,000	88,558	826539
9	30,000	30,000	106835	992924
10	30,000	30,000	126351	1179275
11	30,000	30,000	148713	1387988
12	30,000	30,000	173759	1621747
13	30,000	30,000	201810	1883556
14	30,000	30,000	233227	2176783
15	30,000	30,000	268414	2505197

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