 "Why PPF still comes out a winner")
On March 3, the Ministry of Finance announced a hike, of up to 0.2 per cent, in interest rates on fixed-deposit schemes offered by post offices. The decision to hike the rates was in line with the recommendations of the Shyamala Gopinath Committee in order to render small-savings schemes more attractive, and for returns to fall in line with those of government securities (of similar maturities). The interest rate on the popular PPF, however, was held unchanged, at 8.7 per cent per annum compounding annually.
The Public Provident Fund (PPF) still proves to be a winner when compared with any of its peers. Here's how.
At present, PPF is one of only three exempt-exempt-exempt (EEE) investment schemes available in India. The other two are the Employees' Provident Fund (EPF) and Equity-Linked Savings Schemes (ELSS). While the last carries market risks, the other two are government-backed fixed-income schemes, where the rate of interest is determined every year by the government. The EPF is offered to those employed in an organisation and comes with the employer's share in (contribution to) an employee's account. As an individual, you are eligible to open a PPF account.
Tax liability
What does EEE mean? It means your contribution to the scheme (subject to a limit of Rs 1 lakh a financial year) is exempt of tax, even as it earns interest throughout its term, as well as exempt of tax when withdrawn on maturity (including the interest earned). And the accumulated balance over time in a PPF account is exempt even from wealth tax.
Holding period
A PPF account has a lock-in of 15 years, extendable, as often as one wishes, by a block of five years. The extension period can be with or without contribution to the account.
Rate of interest
PPF is available at post offices and banks. The minimum amount to be deposited every year to keep a PPF account active is Rs 500. The rate of interest is fixed every fiscal and benchmarked against the yield of Central government securities of comparable tenures. The rate of interest at present is 8.7 per cent p.a., compounding annually. Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month.
The maximum amount which can be deposited in a PPF account every year is Rs 1 lakh. The interest earned on the PPF subscription is compounded annually. If the minimum amount is not deposited in the PPF account in any year, the account would be de-activated. To re-activate it, one would have to pay Rs 50 as penalty for each inactive year. Also, one needs to deposit Rs 500 as the contribution for each inactive year.
Benefits of investing in a PPF
For a self-employed individual, PPF makes much sense. For a working person, even with an EPF account, PPF makes sense if one is risk-averse. The amount in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder. Though the lock-in period is 15 years, investors are allowed premature withdrawals and are even granted the facility of a loan, subject to the prescriptions of the PPF Scheme.
Here is how PPF scores over other investments
PPF v/s a fixed deposit
With a similar investment pattern and an interest rate of 9 per cent p.a., is PPF better than a bank fixed deposit? Assume an individual deposits Rs 1 lakh on April 4 every year for 15 years. Assume s/he has an account balance of Rs 1,000 on March 31 (before the April 4 when s/he starts depositing Rs 1 lakh). As s/he deposits Rs 1 lakh, her/his contribution is exempt of income tax under Sec.80C (assuming s/he is not using any other contribution to avail of that exemption amount). If s/he is in the 30-per cent tax bracket, s/he would save Rs 30,000 in taxes yearly. For 15 years, those savings add up to Rs 4.5 lakh (assuming nil returns). And a contribution of Rs 1 lakh for 15 years would create a corpus of Rs 31.20 lakh in one's PPF account at 8.7 per cent p.a.-tax-free on withdrawal. Adding up both, one has created a corpus of approximately Rs 35.7 lakh by depositing only a little over Rs 15 lakh in 15 years.
However, if you had deposited Rs 1 lakh in a fixed deposit for 15 years at an interest rate of 9 per cent p.a., assuming your tax bracket of 30 per cent, you would have made only Rs 25.31 lakh, since the earned interest attracts tax. That's a difference of over Rs 10 lakh in 15 years.
PPF v/s National Savings Certificates (NSC)
A 10-year NSC earns interest at 8.8 per cent compounded half-yearly. The contribution amount is exempt under Sec.80C, the interest earned is re-invested in the NSC and exempt under Sec.80C. However, the final year's interest, when the NSC matures, is not tax deductable as it is not re-invested. The earned interest for the final year will be taxable according to the investor's tax slab.
PPF v/s Post Office Monthly Income Schemes.
This is a no-brainer comparison. A five-year PO time deposit would earn interest at 8.5 per cent p.a. And the earned interest is taxable.
Clearly PPF scores over both.
Investors must remember that only resident Indians can open a PPF account and a person can have only one PPF account. Non-resident Indians and foreigners cannot open a PPF account. However, if you have become an NRI after an account had been opened, according to the terms of the PPF Act you are permitted to continue with it. The funds in a PPF account are non-repatriable.
The Public Provident Fund (PPF) still proves to be a winner when compared with any of its peers. Here's how.
At present, PPF is one of only three exempt-exempt-exempt (EEE) investment schemes available in India. The other two are the Employees' Provident Fund (EPF) and Equity-Linked Savings Schemes (ELSS). While the last carries market risks, the other two are government-backed fixed-income schemes, where the rate of interest is determined every year by the government. The EPF is offered to those employed in an organisation and comes with the employer's share in (contribution to) an employee's account. As an individual, you are eligible to open a PPF account.
Tax liability
What does EEE mean? It means your contribution to the scheme (subject to a limit of Rs 1 lakh a financial year) is exempt of tax, even as it earns interest throughout its term, as well as exempt of tax when withdrawn on maturity (including the interest earned). And the accumulated balance over time in a PPF account is exempt even from wealth tax.
Holding period
A PPF account has a lock-in of 15 years, extendable, as often as one wishes, by a block of five years. The extension period can be with or without contribution to the account.
Rate of interest
PPF is available at post offices and banks. The minimum amount to be deposited every year to keep a PPF account active is Rs 500. The rate of interest is fixed every fiscal and benchmarked against the yield of Central government securities of comparable tenures. The rate of interest at present is 8.7 per cent p.a., compounding annually. Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month.
The maximum amount which can be deposited in a PPF account every year is Rs 1 lakh. The interest earned on the PPF subscription is compounded annually. If the minimum amount is not deposited in the PPF account in any year, the account would be de-activated. To re-activate it, one would have to pay Rs 50 as penalty for each inactive year. Also, one needs to deposit Rs 500 as the contribution for each inactive year.
Benefits of investing in a PPF
For a self-employed individual, PPF makes much sense. For a working person, even with an EPF account, PPF makes sense if one is risk-averse. The amount in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder. Though the lock-in period is 15 years, investors are allowed premature withdrawals and are even granted the facility of a loan, subject to the prescriptions of the PPF Scheme.
Here is how PPF scores over other investments
PPF v/s a fixed deposit
With a similar investment pattern and an interest rate of 9 per cent p.a., is PPF better than a bank fixed deposit? Assume an individual deposits Rs 1 lakh on April 4 every year for 15 years. Assume s/he has an account balance of Rs 1,000 on March 31 (before the April 4 when s/he starts depositing Rs 1 lakh). As s/he deposits Rs 1 lakh, her/his contribution is exempt of income tax under Sec.80C (assuming s/he is not using any other contribution to avail of that exemption amount). If s/he is in the 30-per cent tax bracket, s/he would save Rs 30,000 in taxes yearly. For 15 years, those savings add up to Rs 4.5 lakh (assuming nil returns). And a contribution of Rs 1 lakh for 15 years would create a corpus of Rs 31.20 lakh in one's PPF account at 8.7 per cent p.a.-tax-free on withdrawal. Adding up both, one has created a corpus of approximately Rs 35.7 lakh by depositing only a little over Rs 15 lakh in 15 years.
However, if you had deposited Rs 1 lakh in a fixed deposit for 15 years at an interest rate of 9 per cent p.a., assuming your tax bracket of 30 per cent, you would have made only Rs 25.31 lakh, since the earned interest attracts tax. That's a difference of over Rs 10 lakh in 15 years.
PPF v/s National Savings Certificates (NSC)
A 10-year NSC earns interest at 8.8 per cent compounded half-yearly. The contribution amount is exempt under Sec.80C, the interest earned is re-invested in the NSC and exempt under Sec.80C. However, the final year's interest, when the NSC matures, is not tax deductable as it is not re-invested. The earned interest for the final year will be taxable according to the investor's tax slab.
PPF v/s Post Office Monthly Income Schemes.
This is a no-brainer comparison. A five-year PO time deposit would earn interest at 8.5 per cent p.a. And the earned interest is taxable.
Clearly PPF scores over both.
Investors must remember that only resident Indians can open a PPF account and a person can have only one PPF account. Non-resident Indians and foreigners cannot open a PPF account. However, if you have become an NRI after an account had been opened, according to the terms of the PPF Act you are permitted to continue with it. The funds in a PPF account are non-repatriable.
The author is Founder, WealthBeing Advisors