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to boost pension reforms — PPF likely to be phased out
By Sarbajeet K. Sen , The Hindu Business Line
September 1 , 2003
New Delhi--THE proposed pension
sector reforms are expected to have a major victim, with the Government
considering phasing out the hugely-popular three-decade old Public
Provident Fund (PPF) scheme.
With powerful tax saving and
retirement planning features and backed by Government guarantee on
deposits, the open-to-all PPF scheme has been major attraction for all
sections of the population with millions of accounts in operation in banks
and post offices across the country.
However, the Government is
considering a gradual phasing out of the PPF scheme in order to provide
the pension sector with the necessary `critical mass' to make the new
structure viable. It is being argued that if the PPF scheme is phased out,
a large portion of the deposits flowing into it would find its way into
the proposed pension schemes options since they would also be offering
similar benefits on tax, besides providing old age income security.
"The gradual phasing out
of the PPF scheme seems to be a logical fallout of the decision to usher
in a new pension structure for the country," a highly-placed Ministry
of Finance official said. However, details of the proposed plans were not
The Government has recently
announced the setting up of a new defined contribution pension scheme
under which selected pension fund managers (PFMs) would offer schemes in
which subscriptions would be made by fresh Government recruits and those
in the unorganised sector in order to create a corpus for a steady old age
However, doubts have been
expressed on whether the total number of new Government employees and
other subscribers from the unorganised sector who opt for the new pension
structure would be able to provide the necessary "critical mass"
to make the new pension structure self-sustaining. The axe in the process
is set to fall on the PPF scheme.
Set up under the Public
Provident Fund Act, 1968, the PPF scheme is administered through the
countrywide network of designated branches of public sector banks and post
offices. The scheme that has a 15-year lock in and is extendable by blocks
of five years subsequently is open to all individuals (including
non-resident Indians) including opening of accounts on behalf of minors.
Minimum PPF deposit stands at
Rs 100 and a maximum of Rs 70,000 in any financial year. The account
holder had complete freedom to plan the pattern of his deposits, whether
in lump sum or in instalments though the maximum instalment in a year has
been set at 12.
Deposits under the scheme
attract an interest of 8 per cent compounded annually along with a rebate
of 30 per cent in the highest tax bracket under Section 88 of the I-T Act.
Interest on deposits, interest accruals and withdrawals are exempt from
tax. The scheme also provides facility for premature withdrawal and loans.
As an icing on the cake, it has
been stipulated that the PPF balance cannot be attached under any order or
decree of court in respect of any debt or liability incurred by the