THE public provident fund (PPF) is a good option that investors can choose when they want to plan for their retirement because this is a long term route that will help them manage their investments. There are a couple of developments related to the PPF that could affect investors in the coming time period and hence they need to be ready to take advantage of the situation if the proposed changes are actually implemented. Here are a few things that they need to look at in the near future.
Nature: The PPF is a debt investment which pays an interest every year at the specified rate. This rate has been 8 per cent for the last several years and while the rate is known at the time of making the investment there is a small difference visible here. Unlike other fixed income investments where the applicable rate at the time of investment continues for the entire duration of the investment this rate is not locked in for the investor and so any future change in the rate will be applicable to the entire investment. A sudden change can make the existing planning irrelevant so any change in the rate has to be tracked closely. The rate of return on the investment is tax free in the hands of the investor and hence this provides a healthy post tax return for them. At the same time the amount that is invested in the area will be eligible for deduction under Section 80C of the Income Tax Act.
Investment amount: There is currently a problem for investors who use the PPF for tax saving investments because it leaves them short on the route to completing their total requirements. There is a total deduction of Rs 1,00,000 available under Section 80C so an investor who wants to take the full benefit of this can invest the required sum into various eligible areas and complete the process. If they use the PPF route then they will come up short because the maximum amount permissible for investment under this route is Rs 70,000.
This means there is an additional amount of Rs 30,000 that will have to be completed by the investor by using some other route.
Now there is a proposal to raise the maximum amount that can be invested in the PPF to Rs 1,00,000 from the Rs 70,000 currently. This is just a proposal and if this is implemented then it will be beneficial for the investors who want to complete their tax saving investments at a single place because they can do so with the PPF itself. Apart from this, the real benefit of the PPF account is visible over the long run as the benefit of compounding takes hold and hence the larger contribution will lead to the possibility of a large accumulation in PPF account.
Rate of return: The other thing is that the rate of re turn is fixed by the government and this rate is the one that is applicable for the investors when they put their money in the scheme. This has not been revised since quite some time with the end result that it has remained at 8 per cent. During this interim time period the rates in the economy have gone up and down but the rate for the PPF has not changed.
There is another proposal to link the rate to the average rate of debt instruments in the market and this will mean that there will be a regular change in the interest rate that will be witnessed by investors.
There will also be a downside to this as the investors will also have to be ready to face lower rates when the rates fall in the economy.
The last working for the rates will get the rate here to 8.2 per cent which is higher than what is currently available for the investors. This will also impact the various calculations in terms of the amount that can be earned by the investor when they are using the route.
