Come February and tax planning exercises start. People are on the lookout for tax-saving avenues to reduce the tax liability. One such avenue is the Public Provident Fund (PPF). It is a time tested and popular savings and tax-saving avenue. Over the years, PPF has maintained its position among the best savings instruments available in the market.

MAIN FEATURES OF PPF

• High return due to annual compounded interest

• Complete safety

• Tax benefits

• Retirement planning. It also serves a retirement planning option for those who are not covered by any structured pension plan.

A PPF account can be opened at specified branches of some nationalised banks. Subscription can be made in cash or through a crossed cheque, draft or postal order, in favour of the accounts office, at the place at which that office is situated. The cheque, draft or postal order should be drawn on a bank or post office at the place.

Under PPF, any individual may, on his own behalf or on behalf of a minor of whom he is the guardian, subscribe to any amount not less than Rs 100 and more than Rs 70,000 in a year. An individual may also subscribe to the fund on behalf of a Hindu Undivided Family, an association of persons, or body of individuals.

ELIGIBILITY FOR PPF

An individual, including a Hindu Undivided Family can open only one account. A person having GPF, EPF, CPF accounts can also open a PPF account. More than one account/joint accounts are not permitted. Both, the parents and the child, can contribute out of there respective incomes chargeable to tax and earn rebates. An individual may open one PPF account on behalf of each minor child of whom he is the guardian.

The maximum tenure of account is 15 years. The subscribers are allowed to continue the PPF account beyond 15 years. Non-Resident Indians are not eligible to open this account.

The contribution to the account can vary from year-to-year, from a minimum of Rs 100 to a maximum of Rs 70,000 in any given year. Investments in a PPF account can be made in multiples of Rs 5, either lump sum, or in installments (not exceeding 12 in a year).

The credit to the PPF account is made on the date of presentation of the cheque and not on the date of its clearance. If the subscriber fails to deposit the minimum Rs 100 in a given financial year, the account is considered as discontinued but the interest will continue to accrue and is paid at the end of the term. The default can be condoned on payment of a fee of Rs 10 for each year of default, along with the arrears of subscription of Rs 100 for each year. The account allows a nomination facility.

PPF INTEREST

Interest rate is notified by the Central Government in the official gazette from time to time. Interest is allowed for a calendar month on the lowest balance in credit of an account between the close of the fifth day and the end of the month, and will be credited to the account at the end of each year. Interest is payble at the time of maturity.

Over the years, the interest rate on PPF accounts has come down from 12 to 8%. It has been following the market rates. Starting from 4.8% in 1968-69, it climbed 12% in 1986-87. The 12 per cent interest remained for almost 14 years till 1999-2000. From the year 2000, the interest rate started decreasing and has touched 8 per cent. Still, PPF is amongst the best options available. Considering the tax advantage on interest income, the effective rate of return comes out to be quite high as compared to other savings instruments available in market.

TAX INCENTIVES

Section 88 (now Section 80C) contains incentives on PPF. Contribitions paid out of an assessee’s taxable income into the PPF accounts in the names of the assessee, his children (minor or major) and the spouse, qualify for rebate under this Section. In the case of a Hindu Undivided Family, any member of the family will qualify for rebate.

The interest credited to the fund and withdrawals from the fund are exempt from income tax. The interest credited in a PPF account is not treated as reinvestment for the purpose of section 80C as it is totally tax-free and does not form part of taxable income. A balance held in a PPF account is also completely free from wealth tax.