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Jan 16, 2013, 04.20 PM IST | Source: CNBC-TV18

Hunting for tax-saving instrument: Should one look at PPF?

In an interview to CNBC-TV18, personal finance expert, Hemant Rustagi of Wiseinvest Advisors shared his reading and outlook on different instruments that are available for tax saving in the debt space.

It is that time of the year when people are busy completing their tax saving investments and they will be looking at different instruments to do these investments.

In an interview to CNBC-TV18, personal finance expert, Hemant Rustagi of Wiseinvest Advisors shared his reading and outlook on different instruments that are available for tax saving in the debt space.

Various instruments for tax saving are provident fund (PF), public provident fund (PPF), and national savings certificate (NSC), five year bank deposit and endowment plans from the insurance companies, he suggested.

Check out: Best options to invest in fixed income for 2013

“Any investor who wants to invest money for a longer period and is looking for tax free and risk free returns, then PPF is a great option,” he stated.

Below is the edited transcript of his interview on CNBC-TV18

Q: We would like to know, what is the relevance of public provident fund (PPF) investment in the current market scenario? Are there better instruments out there that are available?

A: It is important for every investor to understand the right way to make investment including the investment that you make for tax saving by following one’s asset allocation process. Therefore, it is important for every investor to make sure that the tax saving investment becomes an integral part of the overall portfolio. The major advantage of doing this is, as an investor you know whether the money has to go into a debt related instrument or an equity related instrument.

There are number of instruments that are available for tax saving in the debt space. There are areas like PF, PPF, NSC, five year bank deposit and there are also endowment plans from the insurance companies.

The fact that PPF offers a very attractive guaranteed risk free and tax free return, it becomes one of the best options available in this space. Further, it also benefits from exemption that is for all the investments that are made and also on accumulation, withdrawals that the investor makes that is there is no tax on that.

Currently, it is offering a return of around 8.8 percent and the minimum investment that one can make is around Rs 500 and the maximum is capped at Rs 1,00,000. So, PPF is one of the investment options for tax saving purpose. Even otherwise considering its features and the kind of return it offers, it deserves to be included in a portfolio.

Considering that there is an inverse relationship between the interest rate and the bond prices, so that part of the debt portfolio, which is invested in market-related instrument has to be very actively managed by realigning it in line, when either the interest rate changes or to ensure that the returns which are already earned are protected.

From that point of view, PPF is a great investment option. It deserves to be in every investor’s portfolio because it has a 15 year time period. So, any investor who wants to invest money for a longer period and is looking for tax free and risk free returns, then PPF is a great option.

There are also options like fixed maturity plan (FMP) in rising interest scenario or income funds in a falling interest rate scenario, which have the potential to give better returns than that PPF can give, but then there are attendant risks. So, one has to be very careful in terms of allocating money to these market-related products.

Overall, when you see that there are different opportunities that are available; PPF deserves to be an integral part of every investor’s portfolio.

Q: If you invest over Rs 1 lakh what happens?

A: You are not supposed to invest more than Rs 1 lakh because it is capped at Rs 1 lakh.

Q: It isn’t as if they just remove the tax status?

A: No, you are not actually supposed to invest more than Rs 1 lakh. It is not that the tax status goes.

Caller Q: I have a PPF account as well as salary account with Punjab National Bank (PNB). I have read that PPF investment can be made online as well, but PNB does not offer this facility. How can I go about doing the same?

A: Currently there are banks like State Bank of India (SBI) and ICICI Bank which allow online investment to be made in PPF. Since PNB is not offering this facility at the moment, you have an option of transferring your PPF account to one of above mentioned banks. If you decide to do that it will be treated as a continued account, which means whatever the balance you have in that will come into this bank.

It is a very simple procedure; you need to go to the designated branch of PNB where you have this PPF account and make an application form. Once the application is processed the designated branch of PNB will transfer all the original documents that is certified copy of your account, your application form, your nomination form along with a cheque or DD for the outstanding amount to the branch that you select out of these two banks. Once the money and the original documents are received by the selected branch, you have to again submit a fresh application form and maybe a new nomination form, and also revise Know Your Customer (KYC) documents. By doing this you can actually transfer your account from PNB to one of the other two banks and avail the facility of online payment.

Q: Can PPF be withdrawn well before the maturity period? Is there any kind of penalty that will be charged to do that? Can a person take a loan against a PPF?

A: Yes, absolutely. We know that it is a 15 year product and most of the people feel that it is illiquid and you cannot take the money out, but there is a facility to take the money out after completion of 7 years. You can take 50 percent of the balance outstanding at the end of 4 years, so that is year preceding when you are going to take the loan. So after 7 years you can take 50 percent of the balance at the end of fourth year. You can take the money out and you can also avail loan facility.

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