With its favoured tax status confirmed, PPF remains a sensible investment option.
The Public Provident Fund (PPF) has come out a winner in the second and latest draft of Direct Tax Code (DTC) proposals making it a prudent long-term investment option. The draft has reinstated the exempt-exempt-exempt (EEE) mode of taxation making it tax-free on investment, return and maturity. The first draft had proposed taxing PPF returns on maturity (exempt-exempt-tax ).
As a 15-year scheme, PPF's primary use is to build a retirement corpus and it's new status will help investors.
| BENEFITS | |
| Advantages | * Good returns for a debt instrument * Lower risk compared to other investment options * Compounding gains * Raising liquidity during an emergency |
| Investment advice | * Invest till the Rs 70,000 limit is exhausted * Build the retirement corpus |
| Future Perfect | * EEE status in the revised DTC draft against EET |
EXISTING INVESTORS
For existing investors, EEE is good news. These investors are already reaping the benefits of compounding and they can build on this. Investments over the past years have accumulated and there is a larger base over which they are earning the income.
Good returns on low risks: The second benefit is that the rate of return on the scheme (eight per cent) is tax-free. In the highest tax bracket, such a post tax return is almost impossible on the debt side. Say, someone in the highest tax bracket earns a nine per cent return, this drops to 6.3 per cent post tax. The other benefit is that PPF being a debt product is not risky. High returns on other debt instruments will increase the risk level, too.
Maximise investment limit: So, if there is an investment that has already been started in PPF, continue it for good returns. With EEE status for PPF, there are more reasons to continue with your investments. If you do not contribute much towards it, increase the allocation. So if you have not exhausted the Rs 70,000 limit in one year, it should be covered in the shortest possible time to be able to earn the interest for the remaining part of the year.
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OTHER ISSUES
Future benefits: Many investors were in doubt about what they should do in case the initial or extended period on their PPF was maturing.
Till some time back, many did not want to extend their contribution in PPF. This was so because they realised that if the matured amount is to be taxed, the total return on investment would fall. Since we have some clarity now, investors who want to continue saving for retirement can extend their investment for the next block of five years. There is no limit to the number of extensions possible on PPF account. So, you should utilise it and extend the account to avail the benefit of compounding in the years to come.
Long term vision: Investors also wonder if it makes sense for them to start a new PPF account at any point in time. The very fact that this product is for a period of 15 years, it discourages a lot of people. And the process of investment stops even before it has started.
One has to understand the nature of the instrument. It is a long-term product meant to create the a retirement corpus to address the requirements once the regular income stops. This is the reason why you need to plan with that mindset when you begin investing in PPF and not consider or compare it with other short-term saving options.
PPF is a debt product but if you are not an employee and do not have a provident fund, this is a good way to ensure adequate and savings for the old age.
Tax exemption on the returns earned will not be available for most other saving options for retirement. So PPF can bring down the overall rate of return. It also has some flexibilities - you can take a loan against it and then withdraw a part of the invested amount from the scheme, which would make it the last resort for raising liquidity during an emergency.
The writer is a certified financial planner