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Monday, Jan 10, 2005

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Ordinance sets stage for PPF closure

Sarbajeet K. Sen

New Delhi , Jan. 9

WITH the Ordinance for setting up a pension regulator having been promulgated, the stage is now set for the popular Public Provident Fund (PPF) scheme to be finally dragged to the guillotine.

The United Progressive Alliance (UPA) Government appears to have concurred with the moves initiated during the previous National Democratic Alliance Government (NDA) that there would not be enough space for the PPF scheme to coexist with the proposed new pension structure in the country.

"The Government's view is that as and when a well-regulated pension fund industry is put in place there might not be any need for continuing with the PPF scheme," a top Government official told Business Line.

The public provident fund scheme has had a nationwide following among the general public for well over three decades with powerful tax saving and retirement planning features on the back of a Government guarantee on the accumulated funds of subscribers.

The open-to-all PPF scheme that started in 1968 has an initial lock-in period of 15 years (extendable in blocks of 5 years each) with deposits carrying an annual interest of 8 per cent compounded annually.

While the deposits attract tax rebate under Section 88 of the I-T Act, interest accruals and withdrawals are exempt from tax.

Moreover, PPF balance cannot be attached under any order or decree of court in respect of any debt or liability incurred by the subscriber.

Officials said that the New Pension System (NPS) that is being ushered in through the Ordinance would attempt to match the benefits offered by the PPF scheme.

"If the general public is given attractive tax incentives for parking their savings with the pension fund managers (PFMs) along with the fund managers giving good returns, one would not feel the absence of the PPF scheme," they said.

By removing PPF that is commonly subscribed to only for its retirement planning features, the Government would also hope to indirectly provide the setting for the NPS to become a viable structure within a much shorter time-span.

The view is that once the scheme is wound up, the monies that would have otherwise flowed into it for old age financial security purposes would then flow to the pension funds that would be registered with the Pension Fund Regulatory and Development Authority (PFRDA).

The PFRDA ordinance, promulgated during end-December, proposes to institutionalise a new defined contribution pension structure.

The structure would allow the general public to participate in it by putting their savings with PFMs who would then manage the accumulated funds for the purpose of providing income security to subscribers after they call it day.

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