Now, with implementation of DTC, PPF will come under the EET (exempt, exempt, tax) regime. Under the EET model proposed by the DTC, contributions to PPF would be taxed at the time of withdrawal. However, balance accumulated or investments made till 31 March 2011 and the interest they earn will not be taxed. Hence only new contributions made on or after the commencement of the code will be subject to tax.
Hence should one invest in PPF or not? Find out below.
Effect of DTC on PPF : As we are all aware that the government has proposed the new tax code (The Direct Tax Code (DTC), ) to replace the current Income Tax Act, 1961 from April 1, 2011. This is to introduce EET (exempt, exempt, tax) regime. PPF currently comes under the EEE tax regime i.e. exempt, exempt, and exempt. When investing in PPF, we get the 80 C deduction, the interest earned is also tax free and also at the time of maturity no tax is charged.
Now, with implementation of DTC, PPF will come under the EET (exempt, exempt, tax) regime. Under the EET model proposed by the DTC, contributions to PPF would be taxed at the time of withdrawal. However, balance accumulated or investments made till 31 March 2011 and the interest they earn will not be taxed. Hence only new contributions made on or after the commencement of the code will be subject to tax.
Hence should one invest in PPF or not? Find out below:
Good investment: PPF fares well under debt investments . Every Indian (male or female), whether salaried or self-employed, married or unmarried, can have an investment in the PPF. 8% tax-free interest is effectively 12.85% pre-tax interest if you are in the 30% tax bracket. If in the 20% tax bracket then the yield stands at 11.25%. PPF thus offers the best returns that too at the same low risk compared to other fixed-income instruments. Further, it has the lowest rate of default as it is equivalent to the risk of lending to the government. Also over 16 years, an annual contribution of Rs 70,000 earns to 30 times the returns i.e. nearly Rs 21 lakhs, which would help one in meeting the future needs. Even if DTC comes in picture, PPF would still earn better returns than other investment options.
Flexibility and convenience: One can investment any amount ranging from Rs 500 to Rs 70000 and that too as per your convenience in PPF. One can invest once in a month (subject to maximum 12 instalments in a year) or can invest in lump sum too.
However, it is better to invest by 5th of every month as the interest is calculated on the lowest balance between the close of the fifth day and end of the month.
Tax benefits: The 8% interest is totally tax exempt under Section 10 (11) of the Income Tax Act. Further, the PPF contributions are allowed as deduction upto Rs 70, 000 under Section 80C. Further, one can open a PPF account in the name of one’s spouse or minor child. PPF is an excellent investment option for the purpose of saving money in the name of minor child as it does not attract clubbing provisions of sections 60-64 of IT Act.
While this benefit may go once the code is implemented, the benefits are there for the current fiscal year. And you never know, we can hope that government may have a change of mind in the near or distant future not to tax our retirement savings
Extension after 16 years: After the initial term of 16 years of PPF is over, one can extend the account for 5 years at a time. This means that the investor can convert PPF into a 5-year deposit that offers the 8% tax-free interest and tax saving under Sec 80C. Further, one can extend the block period of 5 years for unlimited times.
Withdrawals: Beginning the seventh year and every year thereafter, you are entitled to withdraw 50% of the balance to your credit at the end of the fourth or the first previous financial year, the balance to your credit at the end of the fourth or the first previous financial year, whichever is lower. The withdrawn amount can be used for any purpose whatsoever.
For eg: Suppose your account was opened in FY 1990-91. Maturity date =1991+15=2006. First withdrawal date: 1991 + 6 =1997. It can be effected in 1996-1997.
Amount of first withdrawal: The 4th preceding year will be 1997 – 4 =1993 and preceding year 1997 – 1 =1996. Amount withdrawable in the 7th year, ie 1997 is 50% of the balance to the credit as on March 31, 1993 or March 31, 1996, whichever is lower.
Hence it is still good to start an investment in PPF and it would be great if you can invest the maximum this year to make the most before DTC is implemented!