PPF: Do Not Break that PPF amount just yet

Its is that time of the year where one plans for tax savings.PPF is one of the best schemes for tax savings and planning for retirements. The new Draft Direct Tax Code has some drastic changes from April 2011.Lets see what they are.

Every year one can invest 70K in PPF Account. This gives a return of 8 pc per annum and compounding takes over. The account is initially for 15 years and then extended for 5 years at a time.

Currently it is in the EEE regime. Exempt Exempt Exempt. The amount you put in gives you a tax break( the amount gets deducted from taxable income), interest is tax free and when you withdraw the entire amount is tax free.

The Party is over to an extent.

We now move to EET regime.Exempt Exempt Tax regime. The amount you put in gets an exemption, so does the Interest earned. The catch is when you withdraw the amount you will pay rate of tax as per your tax bracket.

Now, how do you circumvent this. First do not touch this amount till you retire. Then take out only small amount every year (Your tax bracket will change, once your salary stops and you move into Senior Citizen bracket).By that time, the laws may also change.

Now what about the money you have put in till March 31st 2011. That amount as on 31st March 2011 gets different tax treatment. It continues to remain tax free at withdrawal. Let me illustrate with an example.

You have 10 lakhs in March 31st 2011.When you withdraw this 2015, you pay no tax. Under new rules, you would have payed 3 lakhs as tax.

The grey area is the interest earned on this 10 lakhs, post 2011. The draft code does not make any direct mention of this. If this is also tax free (If they water down the bill which is most likely), then the PPF balance turns to gold dust.Even if not, you got a tax free amount at your disposal, when you want.

Now if someone withdraws 10 lakhs now and pays off a housing loan. If loan was a 9 pc per annum and PPF is 8 pc, so they were paying 1 pc more. Over 5 years on reducing balance, this works out to about 30K.But they also get the tax benefits which would offset this at least 2011.

Thats the reason you should not touch your PPF account now.