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Creating wealth using PPF route

india Updated: Apr 25, 2007 22:56 IST
Yamal Vyas
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The Public Provident Fund (PPF) is by far the most popular tax saving investment as far as provisions of Section 80C are concerned. This section allows a deduction of up to Rs one lakh on approved investments every year.

Unlike other options, the entire limit of Rs one lakh cannot be used by selecting this route as the maximum permissible limit of investing in PPF in a financial year is only Rs 70,000.

To get the benefit of this investment, the investor will have to open a PPF account with the specified nationalised banks or post offices. Once the account is opened, this will be operational for a period of 15 years. When this period is over, the account can be extended by a period of five years at one go and in blocks of five years thereafter.

An investor can make up to 12 deposits in the account during a year. The minimum amount of deposit is Rs 500 while the maximum amount is also capped at Rs 70,000 during a year. Depending on the convenience of the person, the deposits can be made as and when the funds are available.

A person can also open an account in the name of children. But as far as operation of the account is concerned, the amount of investment in the account of a person and the child should not exceed the maximum amount of Rs 70,000.

It is pertinent to note that in case the amount exceeds this figure, then at the time of discovery the additional investment will be returned to the investor and no interest will be paid from the date of investment.

The interest rate payable on this investment is 8 per cent and this is compounded each year as the amount invested along with the interest earned is considered for further calculation of interest. While the interest figure is calculated on an annual basis, the monthly figures of the amount present in the account are considered for the calculation.

It means that a person who makes his PPF deposit early in the financial year will earn more interest than those who wait till March for making tax saving investments.

There is facility for taking loan as well as withdrawal from the PPF account before the completion of 15 years. The loan facility is available from the start of the fourth year and this will be available to the extent of 25 per cent of the amount standing in the account at the end of the third year. The loan has to be repaid within a period of 36 months.

The withdrawal facility is available for the investor from the start of the eighth year and will be the amount that is 50 per cent of the amount standing in the account at the end of the fourth year or 50 per cent of the amount standing in the account at the end of the seventh year.
Both these routes provide an element of liquidity in the entire investment so that the funds are not locked in for the entire duration of 15 years of the scheme.

Previously, PPF fetched a tax-free interest of 12 per cent. But in the last eight years, the interest has come down sharply.
A PPF account should be used to create wealth over a longer time frame, using the power of compounding. This is the real benefit that will arise to a person who is maintaining and running a PPF account for a long time period.