When Delhi-based Arjun Nath opened his public provident fund (PPF) account 15 years ago, he did it to please his father. The thought of locking in his money for such a long period did not appeal to him. But finally, looking at the tax benefits, he agreed to put away Rs 70,000 a year.

Today, Nath’s father is no more, but he wishes he had the chance to thank him. For, while saving taxes, Nath also managed to save Rs 25 lakh — just the kind of money he needed to buy the house he had long dreamt of. Of course, the interest rates were somewhat higher then, but even at today’s 8 per cent the accumulation would have been more than Rs 20 lakh.

Nath is just one of the many who have reaped the benefits of depositing money in a PPF account. Often dismissed as just a tax-saving vehicle, it does not take much to realise the efficacy of PPF as a saving scheme.

“All of us must open a PPF account as soon as we start earning. One should invest the maximum amount for future requirement or children’s needs or for time of distress,” said DK Aggarwal of SMC Wealth. “This is money that constitutes one’s true wealth.”

Investments in this scheme are safe because they are backed by the central government. The government announces the rate of interest every year and the payouts form a part of the annual budget.

To invest in PPF, all an investor has to do is to go to a post office or a branch of the State Bank of India. Investors in PPF can make a lump sum payment in a year or choose monthly, quarterly, half-yearly intervals, or any convenient time interval to deposit money. To keep a PPF account alive you have to deposit an annual contribution of Rs 500. Failure to do so invites a penal interest. The maximum amount that can be deposited annually is Rs 70,000, which will compounded at the present rate of 8 per cent.

Investments in the 15-year PPF scheme are eligible for Section 80C benefits under the Income-Tax Act, which means they can be deducted from you income to calculate the tax liability. The interest earned is tax-exempt at the time of withdrawal.

The new direct taxes code, which will come into effect in 2011, provides for taxing all schemes at the time of withdrawal, thus reducing the attractiveness of PPF. However, it is possible that PPF accounts may be treated differently, at least the existing ones.

Although you cannot withdraw from the scheme till the end of 15 years, you can take a loan of up to 25 per cent of the amount in the account after two years. After 5 years, you can take a loan of 85 percent of the amount. What’s more, after the sixth year, an investor can withdraw up to 50 per cent of the amount which has accumulated till the end of the fourth year. This facility is allowed only once.

“At first glance, PPF does seem to have unfriendly features like lack of liquidity. But, for risk-averse long-term savers, it is a dream instrument. It's ideal for people too scared to risk the stock market but looking nevertheless for returns above a bank fixed deposit,” says Himanshu Kohli, chief executive officer of Client Associates, a private wealth management firm.

But why is such a scheme not more popular? Kohli says that most wealth managers don’t pitch PPF as an investment for clients as they don’t see any revenue out of it for themselves. Because of this, there are problems in servicing the scheme. “The lack of ECS facilty in the post office also acts as a damper for this instrument,” he adds.