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Withdrawal from ppf account

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Hello CCI members

I have a query about taxability of amount withdrawal from PPF account after 5 year lock in period .If the assessee withdraws PPF account after 5 year lock in period ,will this transaction attract taxability ?Will the assessee liable to pay tax?

I hope for early reply.

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10 Replies

Z ( ) (2960 Points)
Replied 27 November 2014

In my opinion it is taxable. Since it is not taxable ONLY when amount is received on maturity/termination

Mihir (Wealth Manager) (5293 Points)
Replied 27 November 2014

Maturity amount and withdrawal amount from PPF is not taxable.

Z ( ) (2960 Points)
Replied 27 November 2014

Regarding pre-mature withdrawl,are you sure Mihir sir? Can you give any reference?

Mihir (Wealth Manager) (5293 Points)
Replied 27 November 2014

It is not mentioned in the PPF Act or PPF Rules regarding the tax treatment of pre-mature withdrawals, which does not mean it is taxable. But if the interest is fully exempt and pre-mature withdrawal facility is also available, then surely the withdrawal amount has to be exempt, too.

Z ( ) (2960 Points)
Replied 27 November 2014

Am getting your point, infact this was my 1st view point then I read law again, it is specifically mentioned that there will be no tax on maturity/termination which made think the very purpose of constructing law this way. If we see the Structure of the funds then its usually EET (exempt exempt tax) or EEE(exempt exempt exempt). A 3 tier stage wherein 1st E (exempt) is for making the investment. Any investment you make is made exempted (s.b.t. conditions) then 2nd E is (Exempted income).Income from such fund is also exempted then the 3rd tier is either Taxed or exempted

This is true for almost all the funds including Recognized provident fund, Statutory Provident fund, Unrecognized provident fund and this Public Provident fund

The purpose of the PPF was to encourage people to invest, Govt. didn't intended that this fund be utilized or withdrawn otherwise. When you read the rules for PPF and see the form even there withdrawl from PPF is generally not allowed , But at times of financial crisies one may withdraw max. upto 50% of the balance, Termination is an exceptional case(as in case of death) and under income tax it has been recognized that due to such exceptional circumstances the benefit which otherwise would have accrued to assessee does not pulverize.

Further its general law that once a benefit is provided with an intention then such benefit should only be allowed to be sustained if that purpose/intention is complied with.

Intention was saving the money but it was not met so the benefit given earlier should also vanquish.

Further they have specifically mentioned that lump sum received on maturity will be exempt from tax, that does leave the room for that other school of thought which i choose

Exemption shall be provided only if its received on maturity.

I am 99% sure of this postulation, but yeah 1% uncertainity can defeat that 99% certainity.

[I have not referred to any judgements and honestly chances of getting good judgement in such cases is low since the tax amount is low case is ended before it reaches higher level courts, Tax deptt also has fixed monetary limit for filing case (Like for appealing to ITAT the tax effect should be atleast 400,000)and so its very unlikely we gonna see a case :(]

Mihir (Wealth Manager) (5293 Points)
Replied 27 November 2014

Pre-mature withdrawal is not same as pre-mature closure. Pre-mature closure is not possible in PPF even if one wants to.

Even in pre-mature withdrawal, there are rules wherein a accountholder may withdraw only a % of balance to the credit of the account on a specified date, and not the amount as wished by the accountholder.

The big drawback of PPF is lack of liquidity. If they keep a 15-year lock-in period, then not many will invest even if there are tax benefits and attractive interest rates. There is a lock-in of only 5 years, and thereafter, the option is given to the accountholder to not close but a partial withdrawal can be availed in times of financial requirement.

If this partial withdrawal be made taxable, that would add to a major drawback. PPF is for education, marriage and retirement, and only in dire circumstances, the accountholder will choose to withdraw from the account, and if partial withdrawal be made taxable, that would drive away many small investors.

Dipjyoti Majumdar (CA in service & CS. dipmaj@ rediffmail.com ) (3468 Points)
Replied 27 November 2014

Friends & Seniors

The comments and counter comments and logic, spirit is well taken.

Regards,

Z ( ) (2960 Points)
Replied 27 November 2014

[Sir I hope you wont mind if there are any contradictions, I have witnessed knowlege from such discussions and I am learning from you as we discuss,like your view regarding hardhip,I didn't considered it @ first]

Yes pre-mature withdrawl is possible and I also mentioned about this along with %

Sir pre-mature closure is possible (as I mentioned in case of death)

Sir lockin period is 7 years, 5 years is in case of employees

I absolutely agree with your point that this may cause undue hardship, only in dire situation one shall withdraw the amount.

But even during normal course the tax deparment does not think of that, their duty is absolute, If i were AO I would have raised demand . It is for the appelate authority to consider the merits AO don't :( (Further going case to above CIT(A) is virtually impossible cause of tax effect limitation

Even if person is hospitalized or there is death,tax has to be paid. I remember there was a case wherein an assessee would became bankrupt if he would have to pay tax,interest and penalty (it was his fault he delibrately did false tax planing). He pleaded that if the authority will charge interest,penalty and tax then there will be utter financial hardship and he will become bankrupt. In that case also the authorities received the tax although interest and penalties were waived on the ground of hardship. (he had enough assets for payment of just the tax amount hence he was not declared insolvent)

[u/s 220(2A) application can be made for waiver of interest

CBDT also has power to waive interest under some cases (234 A,B,C)

Settlement commission can also waive interest

u/s 273A penalties can be waived]

Govt. should allow flexibility but its their call ...

I can not reject your claim but am unable to reject mine either because there have been so many cases in which this spirit is accepted there been a similar issue under key man insurance earlier

Mihir Sir your viewpoint is as good as that of a judge, but right now I would like to stick to my viewpoint on basis of judgements I have studied so far ( P.S.there's 1 more tiny reason for sticking which is not worth mentioning) and hope that govt. make necessary changes in light of your view point.

But I request you and other members aswell to throw more light on this

Sorry Mansha if my comments have made it rather more confusing

Mihir (Wealth Manager) (5293 Points)
Replied 27 November 2014

Thank Mr. Z. I really appreciate your conviction.

Obviously, the principal amount cannot be taxable. If interest earned is taxable on pre-mature withdrawal, then how will it be calculated? Will it be calculated on the interest earned for all the previous years or only the current years in which withdrawal took place? If only the current years interest, then why not previous years interest, too? What factors to consider before deciding which years interest should be taxable on pre-mature withdrawal?

Secondly, if interest becomes taxable on pre-mature withdrawal, then why not make the reverse entry of principal amount which was availed u/s 80C by the accountholder? Such reversal happens in insurance policies, especially ULIP.

I think the Govt understands the importance of PPF for small investors and which is why they do not want to touch this saving scheme at least in the near future. All other saving scheme interest is taxable except this.

Z ( ) (2960 Points)
Replied 27 November 2014

{with your every question am recalling various case laws I have read so far, am not citing any unless required but yes thank you for taking interest in this discussion}

(Sir am not going into very detail since you are also well versed with the subject,you can very well understand it all)

"Obviously, the principal amount cannot be taxable."

Well actually the principal amount, on which exemption was claimed can be taxed. It is normal principal throughout the income tax Act.

I am only taking the spirit, do not take it as this provision has no relation, am only taking the essence,the spirit

In all these cases, 1st deduction or exemption will be provided then an income shall be deemed

S. 41(1) remission and cessation of trading liability, expense which was earlier allowed as deduction, if recovered, will be deemed as an income

S.41(4) Withdrawl from special reserve

deduction claimed, lateron condition not satisfied, so benefit once given is taken back by treating the amount as income

Bad debt recovery (same thing, ignore that special case

deduction allowed but then on recovering sum, it is deemed as an income

S. 35 Scientific research, read with explanation to S. 43(1), the cost of asset is reduced.

[But asset used w/o using for b/s]Lower of Sale price or deduction allowed u/s 35(1)(iv) shall be treated as income

[DEDUCTION ALLOWED ~~MAY BE~~ TREATED AS INCOME]

S.33AB Amount deposited in NABARD (claimed deduction). Violate the rules. Amount withdrawn shall be deemed to be as an income

S. 54/54F/54EC

Exemption is claimed s.b.t conditions but such conditions are not complied with. exemption claimed is deemed as income (direcly or indirectly you have to pay the cap gain tax)

A bit different but yet on the same lines S. 54B,54D,54G,54GA,54GB & 54H

[TAKE AN EXAMPLE THAT FULL EXEMPTION WAS CLAIMED BUT AMOUNT WAS NOT UTILIZED FULLY, SO THE REMAINING PORTION IS TAXED]

32AC

Deduction claimed but conditions not satisfied. Deduction is Deemed as income

Various taxes and other items

Deduction admisible(by way of expenditure), but not paid within due date as per 139(1). Amount is not allowed to be deducted (akin to above cases,you'd agree right?)

Carry forward of losses S. 72 series

condition: assessee to be same,

condition violated , carry forward(benefit which was once allowed will not be allowed now)

And many more. I think I made my point.

WE TALK OF NATURAL JUSTICE,natural justice then why don't give it to tax department aswell?

They did not taxed me s.b.t a condition, if condition is not met then tell why then should not charge tax which was earlier not taxed,specially when under various provisions they are doing so legitimately

"If interest earned is taxable on pre-mature withdrawal, then how will it be calculated?"

"Will it be calculated on the interest earned for all the previous years or only the current years in which withdrawal took place? If only the current years interest, then why not previous years interest, too?"

A great question, on a similar issue theres been years of debate as to how the interest on enhanced compensation with respect to compulsory acqusition be treated?

2nd similar issue was how the interest on refund of income tax be treated

I will raise an additional problem in this scenario

We know that interest on enhanced compensation is treated as income from other source after providing for 50% deduction.What was the reason behind it?????

Sir I have filed case 10 years ago, now when I receive interest then this interest is for 10 years and not of this year when am receiving the income. Had this interest be treated as income in all th years then tax amount would be different

Sir due to interest rate I have reached 30% slab rate whereas If interest income would have been treated under say 10% slab rate only

(Although when you take it under salary then in such a case, we get relief u/s 89(1), i.e WHEN OUR INCOME IS CHARGED AT HIGHER SLAB RATE but tax would have been lower if salary would have been treated in all the period. THIS IS THE REASON OF 89(1)]

Further Sir, I could have taken benefit of chapter of deduction say 80C the most favourate IN ALL THE YEARS but now I will get such a cummulative benefit

FURTHER I CAN NOT REVISE MY RETURN FOR ALL THOSE YEARS [RECALL S.154/55 defacto time period is 4 A.Y only]

NOW THAT WAS FOR ASEESSEE, BUT NOW TO INCOME TAX DEPARTMENT

AO comes to assessee with notice of demand, he asked for tax on income related to such interest

Now Assessee will again have fun. Recall the period of limitation for which notice can be issued

4 years/6 years/10 years

Say my assessee is covered under 1st category so atmost dd could be raised only for 4 years

The Finance Ministry understood this and provided direct 50% exemption and treats such income only in year when it is received

NOW TO THE 2ND

Sir I have received interest from IT department and this interest also relates to several years

With all due respects to the courts, there were some judgements under which it was held that interest is for say 2 years so .... (same scene which I repeated just above)

I would go with the judgements wherein it was held that such interest will be treated as income in which it is received and will not be attributed to all those previous years

Further I would apply the same spirit in here for interest on such PPF

I would further propose that full interest not be taxable but deduction be provided as is provided in case of compulasory acquisition

[I HAVE THIS JUDGEMENT STORED,SO IF ANY ONE WHO WISHES TO HAVE IT CAN OBTAIN IT]

" What factors to consider before deciding which years interest should be taxable on pre-mature withdrawal? Secondly, if interest becomes taxable on pre-mature withdrawal, then why not make the reverse entry of principal amount which was availed u/s 80C by the accountholder?"

Sir I have answered this in the starting

Sir I called a friend of mine who is currently doing CA and in their course there was a question on this exact facts, the answer given was ,that it is to be treated as income since exemption is available on maturity only

BUT HOWEVER I DONT INTENT TO GIVE ANY WEIGHT TO THIS SINCE THATS PRIMARILY FOR ACCADEMIC PURPOSE ONLY AND WE CAN NOT TAKE REFERENCE FROM TEXT BOOK but have to take it from BARE ACTS,CASES ETC.

Such reversal happens in insurance policies, especially ULIP. I think the Govt understands the importance of PPF for small investors and which is why they do not want to touch this saving scheme at least in the near future. All other saving scheme interest is taxable except this.

Thanks Sir for your time and Sorry for prolly wasting it aswell.