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R.Y. Narayanan

COIMBATORE, Jan. 3

EVEN as the Kelkar panel's recommendations await a final word tillthe Union Budget next month, that the panel has not wielded the axe on certain concessions extended to the Public Provident Fund (PPF) has come as a relief.

A prime reason for this is the fact that the PPF can be operated as a pension plan by those who do not have a comparable pension scheme that Government employees enjoy and even as an additional pension product by those having pension benefits.

It is true that the Government introduced a Provident Fund-linked pension scheme from 1995 for those who are members of the PF but the pension amount is not substantial under this scheme.

It is the PPF which has proved itself to be a dependable ally for the salaried class, mainly in the private sector and the tax incentive provided for the withdrawal from it has made it a convenient pension option for investors. Investments in PPF up to Rs 70,000 a year qualify for the 15 per cent tax rebate under Section 88 of the Income-Tax Act (the earlier ceiling of Rs 60,000 a year for investment in the scheme was raised in line with the general increase in investment in select instruments for tax rebate, including infrastructure bonds, to Rs 1,00,000 a year).

The panel has recommended the abolition of the tax rebate for most of the investments under this section, which includes PPF too. But this in itself may not deal a major blow to those investors who have already seen a sharp decline in the interest rate under PPF scheme from 12 per cent per annum to 9 per cent in line with market trends.

But a major attraction of the PPF scheme is that the annual withdrawal from the scheme, after a specified waiting period, is entirely tax free. Since the scheme runs for 15 years from the date of opening of the account and could be extended for blocks of 5 years subsequently, it allows the investors to build a substantial corpus during their earning years and withdraw a sizeable amount annually after their retirement, provided they leave the accumulated amount untouched.

It is this tax relief that makes the PPF a very attractive pension tool compared to even the normal pension payment, which is treated as an income and is taxed at the hands of the pensioners.

The Kelkar panel has recommended increase in the investment limit to Rs 20,000 from the existing Rs 10,000 for tax deduction under Sec 80 CCC(I) in pension schemes such as Jeevan Suraksha of LIC and other private insurance companies. But these are taxable pension options and the interest earned could be lower than the present PPF interest rate which is 9 per cent.

Of course, there are two other savings schemes that one could rely on for tax-free income — the two RBI Relief Bonds. But these give a lower interest of 8 per cent per annum and 7 per cent per annum, respectively. The better choice would be for investors to put their entire retirement benefits in the 8 per cent RBI tax-free bond to have sizable interest earnings.

But the big question mark is will the Government leave PPF untouched in the long run?

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