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Tax saver and investment option
March, 24th 2010

What is the difference between EPF and PPF?

Where Employees Provident Fund serves all salaried employees, the Public Provident Fund serves everyone - the employed, the unemployed, even children and housewives.

The access to the fund is also quite easy as any post office and some State Bank of India branches can help you open the fund.

The purpose of a provident fund is to provide individuals some form of savings for their retirement years. Naturally, the EPF and PPF are for long term savings.

What kind of income can I one expect from PPF?

The returns from the fund is in the form of interest paid. The interest rate currently is 8% compounded annually. The interest however is not paid out but is compounded (like a bank recurring deposit) till the maturity or withdrawal.

With the current levels of inflation real and stated, the returns from the PPF fund could be low. This is a typical asset class mismatch.

Is there any capital appreciation?

Being a typical debt investment, there is no capital appreciation for the investment.

What is the risk involved with this investment? There is hardly any risk for the capital or the returns from the PPF deposit. The risk however is with inflation which could possibly reduce the value of the returns in the long term and the other disadvantage is the long lock-in period of 15 years.

How about liquidity of the investment?

The PPF gives very little liquidity too. The fund, as mentioned earlier, is for a minimum of 15 years. This can be extended for a further period of 5 years each indefinitely.

The liquidity is in the form of withdrawals that can be made from the fund from the 7th year onwards. The withdrawal value is however limited to a maximum of 50% of the average of the last 3 years' fund values. After the 7th year, one withdrawal can be made every year, based on the same condition.

What happens in the case of the death of the account holder?

In case of death of the account holder before the maturity of the account, the fund will be paid to the nominee/ legal heir.

How is PPF treated for tax?

This is where the PPF scores very high. The PPF comes under the Exempt- Exempt- Exempt category currently. This means that the amount invested gets tax benefits, the interest is not taxed and this applies for the final maturity amount as well.

The investment gets benefits under Section 80C of the IT Act. The investment however is limited to a maximum of Rs.70,000/- per year per person. This limit of Rs.70,000/- includes the deposits made in the name of any dependent children.

Are there any other specific benefits that I need to know?

Some other unique benefits from the fund are:

1. There is no wealth tax on the value of the fund.

2. In case of insolvency the money in the fund will not be attached to the assets. So only this investment is truly ours, come what may. (Except for education in a philosophical sense).

This feature can be very useful particularly for business people in high risk industries / businesses. The fund cannot help anyone if there is tax evasion though.

How does it score on convenience?

The fund scores high on convenience. As a savings tool, it is incomparable in terms of the flexibility of payment and quantum. You can make up to 12 contributions per year. Each contribution can be as low as Rs.100/- subject to a minimum of only Rs.500 per year.

There has to be at least one contribution per year. In case no payment is done for a whole year, there is a charge of Rs.50/- when the next investment is made. The objective is to make savings as comfortable and convenient for the minimum possible investment.

A minor disadvantage is that the fund is yet to go online. So we have to carry our passbook and also face a queue to make the payment every time.

To sum up PPF is a typical savings tool but one has to invest for the long term. This means that there is an asset class mismatch. But on the convenience side, the fund scores pretty high for the flexibility that it offers.

There are additional unique advantages in the form of wealth tax and insolvency benefits from the Public Provident Fund. On the flip side, the long term (minimum 15 years) of the plan is a limitation.

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