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How you can use withdrawals to axe your tax. By D Kumar
According to the amended rules, beginning the seventh year from the year of the first contribution, and every year thereafter, you can withdraw 50 per cent of the balance you had in your account four years ago, or one year ago (whichever sum is less). This, I say, is the best feature of the PPF scheme. Why? Because, effectively, you can use the withdrawn amount to reinvest in your PPF account. While the withdrawals would be free of tax, you would get a rebate on the amount reinvested! (Remember Section 88 of the Income-Tax Act, 1961?) I said ''effectively'' because you must contribute to the PPF from your taxable income. So what you can do is to contribute to your PPF account from your taxable income, exercise the option to withdraw, and use the withdrawn sum to meet your day-to-day expenses. Nice, isn't it? PARTIAL WITHDRAWALS. Now, let me explain with an example. Assume that you contribute a fixed sum, say, Rs 100, to your PPF account every year. In the seventh year, you'd notice a strange phenomenon. You would be able to withdraw as much as Rs 168.72! The next financial year, you would be able to withdraw Rs 238.97! You'd find that, beginning the seventh year, every year until maturity, your net contribution to PPF would be negative even as you would enjoy the full benefits of the tax-rebate on your contribution of Rs 100. There are many investors who shy away from PPF under the mistaken notion that their funds would be locked up for 16 long years. But that's only the term of the PPF. Moreover, liquidity is much higher in the case of PPF than, say, National Savings Certificates. WHY WITHDRAW? Your PPF account gives you 12 per cent interest, and that is tax-free, whatever the amount. Many investors are so enthralled by this expression ''tax-free'' that they crave to invest in PPF even beyond the permissible limit of Rs 60,000 per account per year. And some actually go to the extent of contributing an additional Rs 30,000 (gift-tax free) to the PPF accounts of their children or spouse every year! Such people do not ever take advantage of the premature withdrawal facility that the scheme provides. Unfortunately, what they do not realise is that the pure-growth, open-end debt-based instruments of mutual funds give them an opportunity to earn 14 per cent-plus after-tax income (see Zero Tax Game, BT, April 7,1998). BOTTOMLINE. The PPF scheme is attractive only for the tax-rebate available during the year of contribution. Once you have pocketed the rebate, the best strategy would be to withdraw as much, and as soon, as possible. You should increase the contributions if and only if they provide additional rebates. But if you are already contributing Rs 60,000 without depending on withdrawals, I would say withdraw as much as you can from your PPF account, and put the money in mutual fund schemes. I assure you, you'd suffer from no withdrawal symptoms. |
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The Public Provident Fund (PPF) scheme was
always a good scheme for tax-payers. But since 1986, when the premature withdrawal rules
were amended, it has become superlative. 