ur readers have been asking us two questions consistently: Will PPF withdrawals be taxed?

Can I invest more than Rs 70,000?

Indeed, the Public Provident Fund is one of the most sought after investments for a number of reasons.

You get tax benefits and, being a government-backed scheme, you can be sure no one will run away with your money. Also, the rate of interest is compounded annually, so you get a neat amount on maturity.

If it were to be taxed on withdrawal, it would not seem so appealing, would it?

Let's take a look.

• How to start saving

Enter Section 80C

Section 80C was introduced in the last Budget (February 2005).

Under this section, you are eligible to claim deductions from your income for investments like life insurance premium, PPF, housing loan principal repayment, infrastructure bonds and Equity Linked Savings Schemes. 

The limit to this section is Rs 100,000.

There are no sub-caps to this limit. For instance, you can claim the entire Rs 1 lakh as your principal home loan repayment or you can put the entire amount in ELSS.

Unfortunately, for those who want to invest more in the PPF, there is a limit. Since you can invest up to a maximum of Rs 70,000 per annum in the PPF, you will have to invest Rs 30,000 elsewhere to get the remaining benefit. 

Let's say your taxable income is Rs 100,000. You invest Rs 70,000 in the PPF. Your taxable income drops to Rs 30,000 (Rs 100,000 - Rs 70,000).

Will I be taxed when my PPF matures?

Under the new Budget, you will be taxed when you withdraw your PPF on maturity.

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But when the amount matures or is withdrawn, it will be taxable in that year of maturity/withdrawal.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.

Unfair!

I agree. It is not fair to tax existing investments, where the investor is told, when investing, that the maturity would be free of tax.

It can be guessed here that only the future investments will be taxable.

Why? Because you must understand that nothing can be said conclusively unless the bill is enacted in Parliament and becomes a law.

Let's wait and see!

 Cnergies is an end-to-end solution provider for Tax-Payroll-HR and provident fund.

Tomorrow: All you wanted to know about PPF