Often one tends to invest in PPF more out of income tax compulsion than portfolio planning. But PPF can be looked at a good portfolio option. Here is why:
>> Lowest risk possible: PPF is a govt-backed scheme, so you can be sure the government will not default.
>> Tax rebate on money invested: Under Section 88, PPF contributions are eligible for a 20% tax rebate. The maximum rebate available in PPF is Rs 70,000 a year.
>> Great returns: An investment in PPF will earn you 8%a year. But because of tax rebate, the actual return works out higher. The returns are compounded.
>> No tax on interest earned: The interest earned is totally exempt from tax under Section 10 (11) of the I-T Act. The 8% a year that you get won’t be taxed.
>> Flexibility of investment: You can invest up to a maximum of Rs 70,000 and a minimum of Rs 500 a year. You can invest in up to 12 installments, and each installment can be of different amounts.
>> Exempt from wealth tax: All the balance that accumulates over time is exempt from wealth tax. Also, if you default on loan payments or declare bankruptcy, the PPF account cannot be attached by courts.
And the cons…
>> Changing interest rate: It was initially 12% a year, dropped to 11%, then 9.5% and is now 8%. The rate of interest is fixed by govt and there is nothing you can do about it.
>> Lock-in period: 15 years to be exact. But, in actuality, it works out to 16 years since the last contribution is made in the 16th financial year. Even if you make an investment on the last day of your account (the day it is due to mature), you will still get a tax rebate. But, of course, you will not earn interest on that amount on the last day.
Interest calculation: Interest is calculated on the lowest balance between the fifth and the last day of the month of March.
>> Lack of liquidity: Your money is stuck for years on end. It is not as easy as selling some shares or mutual fund units.
>> How to make it work for you: Take a loan from the third year of opening your account to the sixth year. So if the account is opened during the financial year 1997-98, the first loan can be taken during financial year 1999-2000. The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year.
If you repay the loan in 36 months, interest will be charged at 12 per cent per annum. If you don’t, interest will be charged on the outstanding sum at 6% per month.
>> Second loan: You can obtain a second loan before the end of the sixth financial year if the first one is fully repaid. You can make a partial withdrawal only after five financial years are completed from the end of the year in which the initial subscription was made. So, in effect, it works out from the seventh year onwards.
The amount of withdrawal is limited to 50% of the balance in your account at the end of the fourth year immediately preceding the year in which the amount is to be withdrawn; or at the end of the preceding year, whichever is lower.
For example, if the account is opened in 1993-94 and the first withdrawal is made during 1999-2000, the amount of withdrawal will be limited to 50% of the balance as on March 31, 1996, or March 31, 1999, whichever is lower.