Increased investment limit makes PPF more attractive

Savings is a pre-requisite of investment as without savings there can be no investment.
I am often asked what is the best savings instrument, and I have always maintained that it is Public Provident Fund (PPF) because of its flexibility, rate of return, its and tax advantages. I would like to believe that Arun Jaitley shares this thought as he saw fit to increase the investment in this scheme from Rs 100,000 to Rs 150,000 in his maiden budget.

A PPF account can only be opened by individuals who are resident in India. A parent can open one in the name of a minor child, and an individual can open one in the name of his/ her spouse. There can only be one account in a person's name.
These can be opened only in certain banks (State Bank of India and subsidiaries, ICICI Bank, Bank of India, Bank of Baroda, Central Bank of India, Indian Overseas Bank, Union Bank of India and Vijaya Bank). All branches of these banks are, however, not permitted to open these accounts.

The great benefit I find in this saving is that one can open the account for a very affordable Rs 1,000, and then the amount one has to deposit annually can be as little as Rs 500. One can deposit this at any time during the year. In addition one can make deposits up to 12 times in a year. There is no stipulation that the same amount must be deposited every year. If you are flush with funds in a year deposit Rs 150,000. If not deposit what you can, but at least Rs 500. This flexibility makes this plan unique.
If one forgets to make a deposit in a year, the account is deactivated. It can be revived by paying an activation charge of Rs 50 and Rs 500 for the years no deposits were made.

The scheme is for 15 years. On maturity one has the option of continuing it for a further five years or encashing both principal and interest. There is no tax on the interest encashed.
Interest is paid at 8.7% per annum and it is entirely tax free without any limit. Interest alone grossed up without taking the 80C benefit amounts to nearly 15%, which is significantly better than what one may earn on a fixed deposit (8% to 9% gross).

It should be noted that interest is calculated on the lowest balance between the fifth and the last day of the month (as was done for savings bank accounts earlier). Therefore, if one is making a deposit, it would be wise to make it before the fifth of the month. Interest is compounded and credited at the end of the year to the account.
The amounts deposited in one's own account and those of one's children and spouse (which can now be as high as Rs 150,000 per annum) can be deducted from income under section 80C.

Even though the scheme is for 15 years, one can take a loan on his PPF balance from the third to the sixth year and partial withdrawals are permitted from the seventh year. The interest on the loan would be 2% above the rate of interest paid on the PPF account. The maximum amount that can be withdrawn prematurely is equal to 50% of the amount that stood in the account at the end of fourth year preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.
Furthermore, PPF accounts cannot be attached by any court. However, income tax authorities can attach it for non payment of taxes.

On the account holder's death the balance amount will be paid to his nominee or legal heir even though the term of 15 years may not have expired. Nominees or legal heirs are not eligible to continue the deceased account.
This is a scheme I do not think anyone should ignore. Its benefits are too great.

The writer is MD of Cortlandt Rand and an author