PPF – What tax implication does one have it he withdraws in 7th Financial year

POSTED BY sunil ON April 24, 2013 12:15 pm COMMENTS (6)

Tax benefits can be availed for theamount invested and interest accrued is tax-free. A withdrawal ispermissible every year from the seventh financial year of the date ofopening of the account and the amount of withdrawal will be limitedto 50% of the balance at credit at the end of the 4th yearimmediately preceding the year in which the amount is withdrawn orat the end of the preceding year whichever is lower the amount ofloan if any.
I am interested to know the Tax Implication on this? Does it still be Tax Free???

Also, one of my coleague mentioned to remove this amount and then put it back again for availing Tax benefits… he can continue doing with some amount every year after 7th year.

By this way he can save tax as well with out any New investment…

Is it that simple…. i feel there is a catch, what you guys say.

*** I agree it is not best practise to remove the money, but wanted to know if this will act such simple?

6 replies on this article “PPF – What tax implication does one have it he withdraws in 7th Financial year”

  1. Jha says:

    Thanks Ashal Ji for your clarifications.

    Regarsd, Jha

  2. Dear Jha, I’m trying to answer you.

    1. By keeping on withdrawal & reinvestment, Fresh investment in PPF is avoided.
    If avoiding the fresh investment for tax saving is the sole purpose, the same thing can be achieved much earlier by Tax saver funds as the lock-in period is just 3Y.

    2. We can easily invest fresh money (which was supposed to be invested in PPF) in some other equity MFs or any other specific investments.
    PPF & PF are important for a solid foundation of your wealth’s castle. Think seriously over it.

    3. Money Compounding is also not much affected as interest on PPF is calculated based on daily/monthly available balance. I think, withdrawal & reinvestment in same week, will not affect the compounding interest much.
    How? If you are not investing fresh money, the compounding ‘ll happen only on the 6L Rs. invested in first 6Y & after that no fresh money is there, so compounding ‘ll be impacted in a big way for a 30-40Y period of PPF account.

    4. By this way, we can avoid a lot of tax without actually investing anything a fresh.
    This is actually a wrong practice as the discipline for investment in PPF regularly ‘ll be impacted & the person may not invest the saved 1L Rs. for pure investment. Some part may go for consumption.

    Thanks

    Ashal

  3. Dear Sunil, please read my reply in addition to what dear Pattu (FFC) has told you already. if you are not going to invest fresh & keep on withdrawing 1L Rs. (new limit of yly investment not 70K the old limit) & reinvesting. what w’d you do with your fresh money which was supposed to be invested in PPF every year?

    Are you not intrupting the compounding here?

    Please clarify.

    thanks

    Ashal

    1. Jha says:

      Dear Ashal Ji

      Sorry to object you.
      Actually, I also did the same way as our friend Sinil wants to do. Here are my points:
      1. By keeping on withdrawal & reinvestment, Fresh investment in PPF is avoided.
      2. We can easily invest fresh money (which was supposed to be invested in PPF) in some other equity MFs or any other specific investments.
      3. Money Compounding is also not much affected as interest on PPF is calculated based on daily/monthly available balance. I think, withdrawal & reinvestment in same week, will not affect the compounding interest much.
      4. By this way, we can avoid a lot of tax without actually investing anything a fresh.

      This is only my openion with limited financial knowledge. Pl. correct me. However, I know this practice should be avoided so as to achieve a good corpus of PPF amuont. Also, I think this is not a good financial practice.

      Regards, Jha

  4. Sumit says:

    If he is not able to utilise the total 1 Lac tax deduction under 80C (may be not able to save much or simply not interested in tax saving schemes) –then this seems to me a very innovative idea to save this way. One should really be applauded for finding such a hole in the system. But there must be a catch as you said – I don’t know.
    As far I can see – if he withdraws in march-previous financial year and invest the same in April- next year – the tax saving amount should be more than the loss in ppf interest (for just a month here). Nice!!!

  5. All withdrawals are tax free.
    Technically investment should come from taxable income. Once you withdraw no one can tell whether the money is part of income or no. So the way suggested by your friend will work. However
    1).PPF corpus will be limited since your contributions after a point will not be new. This is the only ‘catch’

    What is the advantage? I can’t see any. This sounds like unnecessary intelligence.

    All tax saving should be integrated with investing for goal. You need to invest each month for your goals. It is only incidental that some of your investments help you save tax.

    Look at it this way instead of wasting you time over such pointless ways.

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