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PPF is still one of the best bets around

Public Provident Fund Scheme needs no introduction. It has been a favourite with investors, young and old for years.

In all probability, even the most die-hard stock market punter has a PPF account secretly ticking for him. This is no surprise.

As recently as the year 2000, PPF earned interest of 12 per cent per annum. Of course, needless to add, this was tax-free.

Include the Section 88 rebate and the associated safety and you had an investment instrument that was too good to be true.

It is an old saying that when something is too good to be true, in all probability it is. PPF became a victim of falling interest rates and on January 15, 2000, the rate fell to 11 per cent.

Investors had barely recovered from this shock when they received two more blows -- the rate was first reduced further to 9.5 per cent and then by FA 02 to 9 per cent.

When PPF first started, way back in 1968-1969, the rate was 4.8 per cent per annum. Some investors now fear that the government is intent on reliving those old days.

However, I feel such fears are misplaced. No one likes adverse changes, least of all when they are connected with financial issues. However, one has to keep in mind that interest rates have dropped across the board.

Fixed deposits no longer yield what they used to. Debt and money market schemes do not yield what they used to. The RBI Relief Bond has given no relief to the investor. Then how can PPF be any exception?

On the other hand, amongst all the schemes under the umbrella of Section 88 which offer tax rebates, PPF wears the champion's crown for many reasons.

The interest rate is 9 per cent per annum, payable annually and is tax-free without any limit. The 9 per cent tax-free is extremely attractive even for those who are not in the tax net. The safety is of the highest order.

The overall ceiling on the contributions to all the schemes under Section 88 is Rs 100,000 out of which Rs 30,000 is reserved for infrastructure related notified instruments.

Out of the balance Rs 70,000, PPF enjoyed a sub-ceiling of Rs 60,000. This forced assessees in need of full cover, to contribute at least Rs 10,000 to some other Section 88 scheme.

This did not make much sense and for ages I have been campaigning for the sub-ceiling of Rs 60,000 to be raised to Rs 70,000 to enable all assessees to take full cover under one single umbrella and the strongest one at that.

Now the good news.

PPF has been amended, raising the maximum from Rs 60,000 to Rs 70,000.

The following is the actual Notification GSR768(E) dated November 15, 2002:
"The existing limits for subscription are minimum of Rs 100 and a maximum of Rs 60,000 in a year. These limits have now been changed to Rs 500 and Rs 70,000, respectively.
"Moreover, a subscriber who fails to subscribe to even the minimum amount, can get the default condoned on payment of a Rs 10 fee for each year of default.
"Also, the subscriber has to pay arrears subscription of Rs 100 each such year.
"These amounts have now been changed to Rs 50 and Rs 500, respectively.
"This notification will come into effect from November 15, 2002."

As I said earlier this is the most welcome news. Under the current scenario the best investment strategy for individuals, taxpayers or otherwise, could have been as follows:
Contribute Rs 60,000 to PPF in the name of all the members of the family to earn 9 per cent. The freedom from tax is ancillary.

The only thing to watch out for is that the total contribution by any individual and those of minors of whom the individual is a guardian should not exceed Rs 60,000.

After exhausting this limit if there is any balance left it should be invested in the old relief bonds which offer 8 per cent tax-free interest payable half-yearly (= 8.16 per cent).

This again, should be in the name of each and every individual of the family and the contribution can be up to the ceiling of Rs 200,000 per account per year.

Here also, care of the clubbing provision has to be taken.

These two strategies put together took care of most of the investible funds generated during the year for most of the families.

Obviously 9 per cent is better than 8.16 per cent. Thanks to this PPF notification, Rs 10,000 extra can be invested per family member in PPF instead of in 8 per cent Relief Bonds. The larger the family the larger is the advantage.

There's another point. The contribution to infrastructure related bonds can now be reduced from Rs 40,000 to Rs 30,000 but the assessee can claim full cover.

These bonds currently offer around 7 per cent interest and this interest is taxable with the protection of Section 80L which is not as powerful as total tax freedom.

Does this mean that the Kelkar committee recommendations on disallowing section 88 (of the Income Tax Act) rebates entirely have not been upon favourably by the authorities?

I hope that is not the case.

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