Monday, February 16, 2009

More on PPF

The Public Provident Fund (PPF) presently ensures a return of 8 per cent per annum, which may look a bit low compared with fixed deposit schemes of banks and some other saving instruments. As we know, PPF has a lock-in period of 15 years, which puts off many people to put in money in this tax-saving avenue. And rightly so. Compared with an Equity-Linked Saving Scheme, which has a lock-in period of three years, the liquidity factor of PPF makes it look an antiquated investment option. From the point of view of creating wealth from one's investment, PPF scores poorly.

There is one more important aspect to note about PPF. Though the lock-in period is 15 years, in practical terms, it works out to be 16 years as the last contribution is made in the 16th financial year. Consider this - if you put Rs. 70,000 per year for 15 years, you will get Rs. 22,92,515.80 on maturity. This means that investment of Rs. 11,20,000 (70,000 X16 years) just doubles over a period of 16 years.

However, a tax-free interest return of 8 per cent will mean different rates to people depending upon their tax bracket. In short, the effective yield on investment is more than 8 percent depending upon the individual's tax slab. For instance, at the lowest rate of income tax, one will have to pay income tax at the rate of 10.3 per cent. In such a scenario, a tax-free 8 per cent interest rate will work out to 8.92 per cent interest before tax. Similarly, for people paying income tax at the rate of 20.6 per cent, a PPF investment will yield a pre-tax interest of 10.07 per cent. And for income tax payers in the highest bracket of 30.9 per cent, an 8 per cent tax-free interest will be equivalent to 11.58 per cent.

The interest on deposits in PPF is totally free and deposits are exempt from wealth tax, which makes PPF more attractive. Moreover, the balance amount in PPF is cannot be attached under any order or decree of the court in case of any debt or liability. This makes PPF the best investment option in the long-term. And PPF is a great instrument for risk-averse investors.

Sunday, February 01, 2009

Public Provident Fund (PPF): A good bet for all times

The Indian fiscal year is coming close to an end (March 31, 2009). This is the time when most of the working professionals come out of their stupor to take care of their tax planning. Most salaried, working professionals, and small entrepreneurs do not treat investment in Public Provident Fund (PPF) among their top of charts for saving part of the taxable income. The salaried employees miss it as the statutory Provident Fund, generally, forms part of the overall compensation package. Others miss it as the projected returns from other tax saving instruments are higher than the current return of 8 per cent on PPF. The recent crash of stock market has, however, made debt funds and government securities more attractive in these turbulent times. PPF, often grossly under-played, tax saving instrument needs its due place when investing in government securities and debts. A PPF subscriber can invest a maximum of Rs. 70,000 in a year and get the entire amount deducted from the taxable income.

With the limit of exemption being Rs. 100,000 in a year under Section 80C of the Indian Income Tax Act, PPF can take care of as much as 70 per cent of the tax saving in a year. The rest 30 per cent can be easily managed through small tax saving benefits that can be claimed.

Look out this blog for more on PPF .....
How much money one can earn over the period of PPF account?
What is the best way to get the best out of PPF??
How financial planning can earn more from a PPF account???

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