ry this. Ask anyone where you should invest to avoid tax. The first answer you will get is: open a PPF account.

The Public Provident Fund is now synonymous with tax saving.

Here's a run down on the pros and cons of this investment.

~ The best of PPF

1. Lowest risk possible

There is no chance of someone running away with your money. Or later on being told that there is no way your money can be returned to you. The PPF is a government-backed scheme, so you can be sure the government will not default. This is the highest security an investment can have and, therefore, the safest.

2. Tax rebate on money invested

Under Section 88, PPF contributions (along with your subscriptions to other schemes that qualify for Section 88 benefits), are eligible for a 20% tax rebate. The maximum you can invest in PPF to avail of the rebate is Rs 70,000 per annum.

3. Great returns

An investment in PPF will earn you 8% per annum. But because of the tax rebate, your actual return of 8% works out to be higher.

Moreover, the returns are compounded. That means you not only earn interest in the money you put in, but you earn interest on the interest earned, too.

Let's say you put in Rs 60,000 in the first year. You will earn Rs 4,800 as interest rate. The next year, your interest rate will be computed on Rs 64,800 (Rs 60,000 + Rs 4,800) as well as whatever fresh amounts you deposit.

4. No tax on interest earned

The interest earned is totally exempt from tax under Section 10 (11) of the Income Tax Act. The 8% per annum that you get will not be taxed.

5. Flexibility of investment

You can invest up to a maximum of Rs 60,000 per annum in the PPF. Some categories of investors, like authors, can go up to Rs 70,000. The minimum that you must put in every year is Rs 500.

Besides having such a huge leeway in terms of the amount of money to be invested, you can invest the money in up to 12 installments. You don't have to put it all in one go. Each installment can be whatever amount you want it to be. They need not all be identical.

6. Exempt from all wealth tax

All the balance that accumulates over time is exempt from wealth tax.

Also, should you default on any loan payments or declare bankruptcy and cannot repay your loans, the amount in your PPF account cannot be attacked by the courts.

~ The worst of PPF

1. The interest rate keeps changing

It was initially 12% per annum, dropped to 11%, then 9.5% and is now 8%. This rate of interest is fixed by the government and there is nothing you can do about it.

How to make this work for you: If the interest rate on PPF declines, interest rates on all other deposits (company and bank) and bonds also declines. So, frankly, there are no other alternative fixed-return investments that can compete because, overall, the interest rates are declining.

2. Lengthy lock-in period

Fifteen years to be exact. But, in actuality, it works out to 16 years since the last contribution is made in the 16th financial year.

Even if you make an investment on the last day of your account (the day it is due to mature), you will still get a tax rebate. But, of course, you will not earn interest on that amount on the last day.

How to make this work for you: Use this as a retirement planning tool. Money you will never touch. If you are just 22, you will get the money when you are around 38. You can use it to prepay your housing loan then.

3. Interest is calculated on the lowest balance

Interest is calculated on the lowest balance between the fifth and the last day of the month of March.

Let's say you have Rs 100,000 in your PPF account and on the 10th, you deposit an additional Rs 10,000. Your interest will be calculated on Rs 100,000 (not Rs 110,000).

How to make this work for you: If making a last minute deposit at the end of the financial year, do so before March 5.

4. Lack of liquidity

Your money is stuck for years on end. It is not as easy as selling some shares or mutual fund units.

How to make this work for you: Take a loan from the third year of opening your account to the sixth year. So if the account is opened during the financial year 1997-98, the first loan can be taken during financial year 1999-2000 (the financial year is from April 1 to March 31).

The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. In this case, it will be March 31, 1998.

You can make a partial withdrawal only after five financial years are completed from the end of the year in which the initial subscription was made. So, in effect, it works out from the seventh year onwards.

~ So should you?

Definitely. It is one of the best long term investment options around, in safety, tax rebates and return!