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PPF’s tax saving bonanza gets much bigger with investment raised to Rs.1 lakh & interest to 8.6% p.a.!

A PPF investor, who could earlier invest only Rs.70,000 in a financial year, would now no longer be required to scout around for other avenues of savings, investments or allocations for availing the full benefit of deduction of Rs.1,00,000 under Section 80C. His long time prayer has finally come to be answered with the Central Government declaring the hike for annual investment in PPF from Rs.70,000 to Rs.1,00,000. This happy announcement on11-11-11was coupled with added joy with the assurance of a higher annual return of 8.6% on PPF accounts, as against the current 8% per annum.


             “Just 8.6% interest on PPF!” This is what you may think, while evaluating return on investment in PPF.  However, do you realize that keeping in view the twin benefits of total tax exemption granted to PPF interest under Section 10(11) of the Income-tax Act and availability of full deduction under Section 80C of Rs.1,00,000 invested in the PPF account, the effective earning on investment after considering the tax savings on the above counts can work out to as high as 18.01% in cases of taxpayers in the top tax bracket of 30.9%?

              Let us see how the PPF magic can work, as illustrated by the Case Study hereunder:

 Case Study:  Mr. X, a taxpayer earning taxable income of more than Rs.8,00,000 attracts tax in the maximum bracket of 30.9%.  He would earn interest of Rs.8,600 at 8.6% on his PPF investment of Rs.1,00,000.  However, considering the fact that he does not have to pay any income-tax on the same, the equivalent pre-tax return would amount to 12.45% or Rs.12,446. This is on the basis that if Mr. X had earned Rs.12,446 at 12.45% on Rs.1,00,000, after paying tax at 30.9%, he would have retained Rs.8,600.

              However, the PPF thrill would not end here.  The interest of Rs.8,600 to be earned by Mr. X should be evaluated on his effective investment in PPF, which is not Rs.1,00,000, but after considering the tax saving of Rs.30,900 on account of deduction under Section 80C (30.9% of Rs.1,00,000), the same would actually work out to only Rs.69,100 (1,00,000 – 30,900).     

              Now, lets compute what Rs.12,446 (pre tax return on PPF) would translate to in terms of return on the effective investment of Rs.69,100 as explained hereinabove.  Wow!  That actually works out to 18.01% on your calculator!  Amazing, but true!  The comparative returns on the above basis for taxpayers in the tax brackets of 10.3% and 20.6% would accordingly work out to 13.87% and 15.67% respectively.


              Every parent would naturally be concerned about building capital for his or her children, which would go to ensure meeting their financial requirements for higher education, marriage, settlement in life, etc. One of the major stumbling blocks in doing so are the clubbing provisions under Section 64(1A) of the Income-tax Act, which provide that any income arising to a minor child is required to be clubbed with the income of either the father or the mother, whosever’s total income is greater. Imaginative planning through investment in PPF, can be resorted to achieve the objective of building up ‘tax free capital’ for children and in particular minors, successfully overcoming the hurdles of the clubbing provisions.

            The following illustration will highlight what magic PPF contribution by an individual in the account of his minor children can weave, for achieving the objective of building up tax free capital for them:

 Illustration: Dr. and Mrs. Amdavadi are blessed with twins, a son and a daughter on11-11-11. They are in the income bracket of over Rs.8,00,000, thus attracting income-tax at the marginal rate of 30.9% each. They are desirous to build-up an independent investment for each of the two children and secure a bright future career for them. The couple would be well advised to forthwith open a PPF account in the names of each of their two children. Dr. should plan to annually contribute Rs.1,00,000 in the PPF account of his son and his wife can plan an annual contribution of Rs.1,00,000 in the PPF account of her daughter (the total contribution being Rs.2,00,000). The contributions are proposed to be continued for 18 years i.e. until each child attains majority).

             Just see what amazing results can be achieved at the end of 18 years:

  •  In respect of the total contribution of Rs.1,00,000 each made by the Amdavadi couple in the PPF accounts of their son and daughter respectively, they would each be eligible to secure an Income-tax saving at 30.9% of such contribution, being Rs.30,900 under Section 80C of the Income-tax Act. Considering the tax saving of Rs.30,900, the actual contribution of each, for the investment of Rs.70,000 each year would effectively work out to only Rs.69,100 each.
  •  The PPF account would earn interest at 8.6% per annum which would be totally free from Income-tax. Thus in effect, the clubbing provisions under the Income-tax Act would have no adverse consequence.
  •  At the end of 18 years, i.e. up to the attainment of majority of each of the child, the balance in the two accounts would grow to Rs.43,12,500 in each account. The Amdavadi couple would thus achieve the dream of building up a total capital of Rs.86,25,000 for their two children by the time they attain majority.

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