Public Provident Fund (ppf)
The Public Provident Fund (PPF) scheme was started in 1968-69 with the aim to provide a financial instrument to workers in the unorganized sector to ensure old age income security by accumulating sufficient savings. It is a defined contributory scheme with individual accounting system. One may open a PPF Account in any Post Office or in the designated branches of any nationalized bank for a minimum period of 15 years. The minimum amount of subscription is Rs.100 (as fixed on 1968-69) and the maximum amount is Rs.60,000 per year (Rs.70,000 as per the Finance Bill, 2002). A member can have a maximum of 12 subscriptions in a year.
The amount contributed in the PPF account is eligible for tax rebate while the accretions and withdrawals are exempt from taxes. Subject to some conditions, one withdrawal per year can be made on expiry of six years from the date of opening the account. With some restrictions, an account holder can take a loan after the third year. Parents may also avail the tax benefits by subscribing to the PPF against the name of their minor children. An account holder may continue the same in a block of five years, after maturity, to maximize the tax exemption and the compounding effect of interest. Earlier, the rate of interest was 12 percent but following the general decline in interest rate, it was brought down to nine percent per annum. A young man at the age of 25 years may start a PPF account and continue paying Rs.1,000 every year and can accumulate up to Rs.2,15,711 by the time he attains the age of 60 years, after enjoying the tax rebates!
Despite the operation of the scheme for more than three decades, it covers only about one percent of the working population. Most of the account holders are from the organized sector, aiming for income tax planning and not old age income security, while most of the employees of the unorganized sector are not even aware of this scheme.
Tax rebate is available for subscriptions to the PPF account but there is no penalty for premature withdrawals. Hence, many individuals misuse the scheme for tax evasion.
No professional fund manager manages the corpus from the PPF scheme. Withdrawals are supported from the part of the annual accretion. The State Governments borrow 75 percent of the net amount of annual accretion and the rest is diverted to the Public Account. The account holder gets the government stipulated fixed rate of interest (presently nine percent). Considering the foregone revenue (income tax), the actual cost of the scheme is even higher, but the possibility of achieving the objective is extremely doubtful.