Celebrate CA Day with CAclubindia PRO. Use Code: CADAY10 Subscribe Now!

Deduction u/s 80 C- PPF

(Guest)

Hi I have the following query:

Mr. X had opened a PPF account in 2000. He used to deposit Rs. 70,000/- regularly in every year. Now in March 2010 he is out of cash and has a tax liability. He withdraws Rs. 70,000/- from the previsouly deposited amounts and reinvested the same on the next day and claimed the deduction u/s 80 C. Whether this claim of Mr. X will be allowed or not?

Please reply with relevant section.

Thanks in advance.

Reply
Follow
Share

9 Replies

Ratan Deep Saxena (Asstt Manager (Accounts & Finance)) (2998 Points)
Replied 27 April 2010

Dear Ketan,

PPF will be taxed under the Exempt-Exempt-Tax Rule. EET is nothing but a name for the tax system, where investment in certain savings plans are deductible from income.

This far, you were eligible for rebate whatever your investments in the PPF. The interest and maturity amounts were tax free. To understand how a rebate worked, read Smart tax-saving solutions.

Now, you will get the deduction from your income, thus lowering the tax liability.

The interest amount is also exempt under Section 10.

But when the amount matures or is withdrawn, it will be taxable in that year of maturity/withdrawal. It will be taxed even if you go in for a premature withdrawal.

Accordingly, the principal amount at the time of maturity will be taxable as per your slab rate.

Let's say you invest Rs 10,000 every year in PPF. After 15 years, you receive a lumpsum of approximately Rs 215,000. Every year, you are eligible for a deduction of Rs 10,000 from your income and thus save tax on it.

Now, it has been proposed that whatever amount you receive on maturity, your deposits of Rs 150,000 (Rs 10,000 x 15 years), will be taxable out of the total amount.

This can be termed as Deferment of Tax and not saving of tax.

In other words, you will defer (postpone) the payment of tax, depending on the lock-in period of your tax saving investment. Some time or the other, though, the investment will mature. And tax will be levied then.

regards,

ratan

1 Like

Rachit (Analyst) (913 Points)
Replied 27 April 2010

Dear Ketan

Yes, deduction will be allowed, as per the provisions of sec 80C investment can be made out of taxable income or otherwise.

(Guest)

Dear Ratan Sir,

The EET scheme of tax will be applicable in the Direct Tax Code regime under the Income Tax Act i.e. current regime the EEE scheme the withdrawl are exempt from tax.

vijay singla (learner) (340 Points)
Replied 27 April 2010

if it is repayment of loan taken from ppf then it is not eligible otherise eligible

Shamika (Article) (44 Points)
Replied 28 April 2010

it is deductible...you can get a deduction of rs. 70000 in which u deposit in ppf...no matter from where you have get a cash and deposited...deposit in ppf is important.....

Rachit (Analyst) (913 Points)
Replied 28 April 2010

The erstwhile sec.88 (2) upto 31/03/2003, required the sums to be deposited be out of income chargeable to tax. But subsequent to the amendment by Finance Act 2002 one is free to make investments from money which is not out of income chargeable to tax.

Mukesh (Law) (24 Points)
Replied 28 April 2010

intrest in ppf is exempted u/s 10, thus all the maturity/ prematurity amount withdrwan from ppf is tax free

Deepak Tapse (Accounts Manager - Taxation) (1771 Points)
Replied 28 April 2010

Yes, he can claim

Krishna (na) (34 Points)
Replied 08 May 2010

Ratan,

I have a question for what you have explained about the taxation for the principal amount post maturity. In your example, tax for Rs 1,50,000 after 15 years.

AFAIK, 80C allowed exception up to 1,00,000. In case if the total savings eligible for 80C is more than one lakh, how does it work. For example, say some had saved Rs 2 lakh in various categories like PPF, company PF, infrasture bonds and insurance premiumns. How can we say principal invested in PPF is not already taxed? Are you referring the principles of any investment coming under 80C will be eligible for taxation post maturity? Doesn't it make very complicated?

Thanks,

krishna