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Wednesday, April 23, 2014

PPF maturity amount is exempt from Income tax

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I am a salaried person with very little/ I no knowledge on savings products such SIPs, bonds and ETFs. I used to save with the legacy savings methods like PPF and FDs, and I do not have a home loan.


How should I save to live and beat inflation and gain some good profits? ­Bala A s an investor, you have been invest ing in traditional investments. PPF is a very good investment tool for the long term and one should certainly have it in portfolio. PPF and FDs are stable investment avenues but many a times are not able to beat inflation. Since you are now looking at investments actively, it is imperative to first look at savings you can do in a month. Also you should write down the future goals which may require fund outflows like children's education, marriage and/or house purchase. This will help you segregate the investments into long-term and short term classes and decide asset allocation for equity and other asset classes.

 

A systematic investment plan (SIP) is a tool to invest each month into equity mutual funds. Equities are known to be an asset class to generate supernormal returns in the long term and SIP is the best way to invest in equity funds.
The allocation to equities should be made with a long-term view of minimum 10 years. The returns equity funds may generate will beat inflation in the long term. Actively manage your equity investments to enhance the returns.

 

There were many tax-free bond issues in the past in AAA rated government companies, which were offering very good yields upwards of 8% for 10, 15 & 20 years. If any such issues are offered in future, you can lock some money in these avenues. Also PPF and PF can be used for the retirement purposes and for long-term investments.

 

One can use Gold ETF to invest in the yellow metal to avoid physical holding. Recurring FDs can be used for short-term purposes. Also you should have an insurance term plan as a risk management to safeguard your family.
Amount of insurance will depend upon the salary levels you have.

What are the tax benefits these instruments offer over other tax-saving instruments?


P F and EPF are the same things. Under this scheme, a stipulated amount is deducted from an employee's salary and contributed towards the fund. The employer also contributes the equal amount to this fund. The amount accumulated in the PF is paid at the time of retirement or resignation. Or, it can be transferred from one company to the other if one changes job. In case of the death of the employee, the accumulated balance is paid to the legal heir. The amount you invest in EPF is eligible for deduction under the Rs 1 lakh limit of income tax act. If you have worked continuously for a period of five years, the withdrawal of PF is not taxed. If you have not worked for at least five years, but the PF has been transferred to the new employer, then too it is not taxed.


If you withdraw it before completion of five years, it is taxed. The Public Provident Fund (PPF) has been established by the central government. You can voluntarily decide to open a PPF account in any nationalized bank that handle these accounts. You can also open it at certain select post offices. The minimum amount you can deposit in this account is Rs 500 per year and the maximum amount is Rs 1 lakh. Interest earned on PPF is compounded annually and credited at the end of the year. A PPF account gets matured after completion of 15 years.


Premature closure is not allowed and can be extended in blocks of 5 years each after the end of the first 15 years. The amount you invest in PPF is eligible for deduction under the Rs 1 lakh limit. On maturity, you will not pay any tax.

 

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