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Sunday, Jun 02, 2002

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Public Provident Fund: Cash in on the returns

S. Venkatesan

In these difficult times, investors can turn to small-saving schemes backed by the Government.

IT is difficult times for the small investors. Interest rates are at an all-time low. The investment climate is not too conducive, and the equity market too risky. So, what are the options available to the small investor? Small-saving schemes backed by the government are some risk-free options. Last week, we looked at the Post-office time deposit accounts and the National Savings Scheme. In this second part of the article, we will look at some more Government schemes:

Public Provident Fund accounts

The duration of this scheme is 15 years (minimum). A minimum deposit of Rs 100 is required and a maximum of Rs 60,000 is allowed in a financial year. Only individuals and HUFs are eligible for this scheme. The deposits can be made in monthly intervals. The latest rate of interest (post-Budget) is 9 per cent compounded, which is credited to the account holder at the end of every financial year. This interest is payable at the time of withdrawal.

This scheme enjoys rebate under Section 88 of the I-T Act within the aggregate of Rs 60,000. As per the latest Budget proposals, the deposits need not be out of the current income chargeable to tax. The most attractive feature of this scheme is that the interest is completely tax-free under Section 10(11).

The subscriber is entitled to partial withdrawal of the funds deposited in this account every year after the expiry of five years from the end of the financial year in which the initial deposit was made. The amount of withdrawal is restricted to 50 per cent of the balance standing to his credit at the end of fourth year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower. Thus, for instance, if a person makes a first deposit on February 15, 1999, he can make a first partial withdrawal after April 1, 2004. The amount that can be withdrawn will be lower of balances lying as on March 31, 2001 and March 31, 2004. The scheme gives also the option to continue the account beyond 15 years. The subscriber must exercise this option within one year from the end of the financial year in which it expires. He may extend this plan for a further block period of five years.

In such a case, he may make partial withdrawal each year, subject to the condition that the total of such partial withdrawals within the extended block period of five years cannot exceed 60 per cent of the amount standing to his credit as the beginning of such extended block period. The subscriber may extend again his account for a further block period of five years and so on. Where such extension has not been made, he may withdraw the entire balance standing to the credit of the account at any time.

The deposit earns interest until the time of such withdrawal.

The PPF is popular because of the non-taxability of its interest income throughout the tenure of the scheme. Suppose Rs 5,000 is deposited at the end of each year, the amount accumulates to Rs 1.59 lakh at the end of the 15-year period. If Rs 60,000 is deposited each year, it becomes Rs 19.07 lakh at the end of the tenure. Suppose the account is opened with a deposit of Rs 5,000 and thereafter Rs 100 is deposited to keep the account alive, it becomes Rs 21,000 (approximately) at the end of the 15-year period.

As per the scheme, the current rate interest is 9 per cent (tax-free) in the existing low interest regime. However, where an investor also enjoys rebate under Section 88 of the I-T Act in the first year of deposit as well as later years during the subsistence of the account, the effective return increases to 11.45 per cent.

Where in certain cases the rebate under Section 88 comes down to 15 per cent as per the latest Budget due to the total income exceeding Rs 1.50 lakh, the effective return comes down to 10.76 per cent. If the account holder chooses to make partial withdrawals after five years as seen earlier in each year and reinvest the same amount in the next month, his effective return goes up to 15.53 per cent.

The interest goes slightly down to 13.84 per cent in the case of persons with gross total income more than Rs 1.50 lakh since the rebate under Section 88 has been curtailed to 15 per cent in such cases from the financial year 2002-03.

However, it should be clearly understood that the above returns are based on the assumption that interest rates remain constant at 9 per cent throughout the tenure of the scheme.

The PPF is particularly advantageous to persons falling in the highest bracket of income tax since interest is completely exempt from tax. It also serves as a real long-term saving scheme for middle-class investors.

Six-year post-office monthly income scheme

The minimum deposit under this scheme has now been reduced to Rs 1,000. The maximum is Rs 3 lakh for a single account and Rs 6 lakh in a joint account. Interest is at 9 per cent per annum payable monthly. Thus, on a deposit of Rs 12,000, Rs 90 is paid every month. A bonus of 10 per cent is paid on maturity.

Hence, for a deposit of Rs 12,000, an additional amount of Rs 1,200 is paid as further bonus on maturity, that is, after six years.

The interest payable every month is eligible for deduction under Section 80L within the overall limit of Rs 9,000.

However, the deposit under this scheme does not give the investor the benefit of rebate under Section 88.

The investment again will not come under the definition of asset subject to wealth tax under the Wealth Tax Act.

Though the scheme professes it pays an interest of 9 per cent monthly, because of the terminal bonus offered, effective return increases to 10.74 per cent, provided the investor does not come under tax liability or he enjoys full deduction of interest under Section 80L of the Act.

Where his limits under Section 80L are exhausted due to investment in other schemes, his returns under this scheme come to 9.79 per cent, 8.75 per cent or 7.77 per cent, depending on his tax slab of 10 per cent, 20 per cent or 30 per cent, which is a post-tax return.

(To be concluded)

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