Personal Finance: How To Have Your Pig (gy Bank) And Eat It Too

Contrary to the general belief that PPF accounts are illiquid and rigid, they offer attractive liquidity options to investors along with tax savings.

Austerity ran in Sridhar Venkatraman's blood. His family knew it; his friends knew it; and indeed, almost the entire trading community in and around Mylapore, a staunchly middle-class Chennai-neighbourhood, knew it. So there was no surprise when he decided, at the age of 24-a mere three years into his career as a chemical engineer-to plan for his retirement. Venkatraman had no pretensions about his ability to play the market and bonds boggled his mind. So, he settled for the good old 11 per cent tax-free PPF account (it was 12 per cent when he opted for it in 1994, but the rate was revised to 11 per cent in January, 2000). He invested Rs 40,000 each in the first two years and then upped his investment to Rs 60,000 for each of the subsequent years. He knew this wasn't particularly smart: his insurance premium and provident fund contribution meant he could avail the maximum permissible tax rebate under Section 88 of the it Act by investing a lesser quantum in PPF (under this scheme, 20 per cent of investments in specified schemes like the PPF, insurance premia, and pf deductions, subject to a maximum of Rs 60,000 can be claimed as a tax-rebate). Still, 60,000 had a nice ring to it and Venkatraman fell for it.

PPF Snapshot

ť Tax rebate of 20% on PPF investments, up to Rs 60,000 per annum.
ť Interest on PPF (11 per cent) is exempt from tax under section 10(15)(i) of Income-Tax Act.
ť The rebate extends to the PPF accounts of minors and annual gifts to minors is also exempt from gift tax.
ť Credit balance in PPF accounts is exempt from wealth tax.
ť Since the government is a guarantor, there is no possibility of a default.
ť The balance in PPF accounts can't be attached even on the basis of a court-ruling.
ť Loans, at the end of the second year, and withdrawals, at the end of the sixth, are possible.
ť Money withdrawn from the PPF accounts is exempt from tax.

By the end of the sixth year, then, Venkatraman had Rs 4,66,000 in his account. Around the same time-November, 2000-some friends asked him if he would be interested in a trip to the Serengeti reserve in Africa. Venkatraman was tempted: he hadn't had a break in four years and a safari did sound interesting. Then he thought about the amount he'd burnt up in renovating his apartment, doing up his car, and upgrading to a fully-loaded PIII pc and the Rs 100,000 the safari would cost seemed too high. There was only Rs 50,000 in his checking account, and with March around the corner, he needed to raise the Rs 60,000 that would go into the PPF account.

"Shush,'' said friend number 1, when Venkatraman told the Serengeti-bound team about the problem. "Draw some money from your PPF account."

Venkatraman didn't like being shushed, but the revelation-that's what it was in this case-shook him.

"Stop gasping like a grounded guppy," laughed friend number 2, "and ask an investment advisor."

Venkatraman found out that his friends were indeed right. Money credited to the PPF account was repayable only after 15 years. But account-holders could withdraw money from the end of the sixth year onwards (and once every year). The amount that can be withdrawn thus? The lesser of 50 per cent of the balance in the account four years back or the previous year. Venkatraman found out that he was allowed to withdraw the lesser of Rs 86,787 (50 per cent of Rs 1,73,573) or Rs 2,33,208 (50 per cent of Rs 4,66,415).

The investment advisor Venkatraman approached was a magnanimous soul and he didn't stop at this revelation. "It's just like getting some of your capital back,'' he said. "With interest, and tax-free." What's more, our numerically-challenged chemical engineer discovered, the money thus drawn (or withdrawn) could be used for anything, even opening another PPF account. What the advisor didn't tell Venkatraman was the fact that a six-year old PPF account was the ideal thing to counter them March blues.

Here's how: liquidity is always a problem in March. Most people find out that they have to channel a fair bit of money into tax-saving investments (Rs 60,000 in Venkatraman's case). A six-year-old PPF account (from which you can withdraw money), then is a supplementary resource. Our recommendation: withdraw the entire amount you plan to invest in PPF that year from your PPF account and use it for routine expenses; and contribute towards the PPF from your current taxable income. Since income-tax regulations state that ppfcontributions are to be made from taxable income, you can claim a 20 per cent rebate under Section 88.

"How sacrosanct is this six-year thing. What if I had needed the money last year?" asked Venkatraman. The advisor was ready for this: it was the kind of academic query investors who weren't particularly smart raised. "Then you could have taken a loan against your PPF account, but it isn't really relevant now, is it?" he said gently but firmly, and showed Venkatraman the door.

Still, since it may be of some relevance to others, here goes: at the beginning of the third year, an individual can avail a loan up to 25 per cent of the balance in his account at the beginning of the first year. This loan is repayable within three years, and comes at an annual interest rate of 12 per cent, which effectively works out to just 1 per cent because the individual continues to earn interest on the amount at 11 per cent. If extended beyond a period of three years, the interest rate soars to 18 per cent of the outstanding amount. And after he finishes repaying the first loan, the investor can go for another one. However, the loan scheme on a PPF account ceases to exist at the end of the sixth year when investors can start withdrawing money from their accounts.

And that is the story of how Venkatraman came to be spotted having a whale of a time at Serengeti.