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PPF: Tax-saving tool that provides steady
February, 11th 2010

January calls for the revelries in the new year but it also reminds one about the investments to be done to avail tax benefits before the financial year comes to an end. The most commonly known options for tax planning are equity linked schemes of mutual funds, home loans, tax-free bank deposits, public provident fund (PPF) and national savings certificate (NSC), among others.

However, there are certain instruments that need to be looked at schemes that go much beyond just being a tax shield. For example, PPF not only provides tax benefits but also serves as a retirement planning tool for those private sector employees and self-employed who dont have the advantages of an employer-provided retirement benefits such as employee provident fund (EPF), gratuity and pension.

In an endeavour to help our readers choose between various investment options that would provide them tax incentives as well, we at ET Intelligence Group decided to explore the Public Provident Fund in detail.

The most powerful force in the universe is compound interest, said Albert Einstein, and PPF woks on the same principle. A systematic and orderly approach to investment in PPF can build a large retirement corpus.

PPF is a government-backed scheme, which can be started with a minimum yearly subscription of as low as Rs 500 to as high as Rs 70,000.

This comes easy on the pocket, as one does not need to deposit a huge chunk of money at one go. Infact no lender can claim an individuals PPF money even in the event of bankruptcy.

The interest earned on the PPF subscription is compounded and is calculated on the lowest balance between the fifth and the last day of the calendar month and is credited on 31st march of every year. The entire balance that accumulates over time is exempt from tax at maturity.

However, under the new tax code, which is yet to be approved, it is taxable on maturity. A flip side is that PPF is an extremely illiquid investment instrument. Its long lock-in period works out to 16 years since the last contribution is made in the 16th financial year. However, one gets the facility to withdraw money from his PPF account only after the fifth financial year.

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