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Contributing to PPF for 6 years & reusing the fruits for next 9 years is like eating your cake & keeping it too!

   All taxpayers are keen to avail of the maximum benefit of deduction under Section 80C of the Income-tax Act. The major concern, however, for most of the taxpayers is how to raise the necessary liquidity required for the purpose of investment. We shall discuss in the present case study an imaginative and innovative strategy of ‘the PPF refinance plan’ which can go a long way to meet this objective.


Facts: Mr. Sen is in the maximum tax bracket of 30.9% with taxable income over Rs.10,00,000 and thus plans to avail of the tax saving of Rs.30,900 under Section 80C, through investment of Rs.1,00,000 in PPF. His concern, however, is the necessary liquidity of Rs.1,00,000 required for the purpose on an annual basis.

Planning: Mr. Sen can go ahead right away to open his PPF account and plan annual investments of Rs.1,00,000 out of his own resources for the first six years. From the seventh year onwards, he can plan to avail the benefit of the withdrawal facility, under which one withdrawal is permitted per year of an amount not exceeding 50% of the balance standing to his credit at the end of the fourth financial year immediately preceding the year of withdrawal. Accordingly, Mr. Sen can plan withdrawals as shown in the chart below from his PPF account up to Rs.1,00,000 every year, so as to re-finance the necessary liquidity of Rs.1,00,000 needed for his annual investment of Rs.1,00,000 in the PPF account.  


 Year Opening      Contri.     Interest      Withdr.        Closing     Income-tax 
         Balance       to PPF    @ 8.80%    from PPF     Balance    Saving

    1    Nil               1,00,000      —              —      1,00,000     30,900

    2    1,00,000    1,00,000    8,800           —       2,08,800    30,900

    3    2,08,800    1,00,000    18,374          —      3,27,174    30,900

    4    3,27,174    1,00,000    28,791          —      4,55,966    30,900

    5      4,55,966    1,00,000    40,125        —      5,96,091    30,900

    6    5,96,091    1,00,000    52,456          —       7,48,547    30,900

    7    7,48,547    1,00,000    65,872    1,00,000    8,14,419   30,900

    8    8,14,419    1,00,000    71,669    1,00,000    8,86,088    30,900

    9    8,86,088    1,00,000    77,669    1,00,000    9,64,063    30,900

  10    9,64,063    1,00,000    77,976    1,00,000   10,48,901    30,900

11    10,48,901    1,00,000    84,838    1,00,000    11,41,204    30,900

12    11,41,204    1,00,000    92,303    1,00,000    12,41,630    30,900

13    12,41,630    1,00,000    1,00,426    1,00,000    13,50,894    30,900 

14    13,50,894    1,00,000    1,18,879    1,00,000    14,69,772    30,900

15    14,69,772    1,00,000    1,29,340    1,00,000    15,99,112    30,900

16    15,99,112          Nil           1,40,722      Nil          17,39,834    Nil   

Total        15,00,000     11,39,834      9,00,000    17,39,834    4,63,500


  • Mr. Sen would be required to effectively contribute to his PPF account from his own resources for the first six years only. For the seventh year, he would be entitled to draw Rs.1,00,000 (being within 50% of the balance in the account at the end of the third year). From the eighth year onwards, his total investment requirement of Rs.1,00,000 can be fully drawn by way of withdrawal from his PPF account. He can thus comfortably refinance the liquidity required for his PPF investment for the remaining years.

  • Under Section 80C, the earlier requirement that the eligible investment should be     made ‘out of the taxpayer’s income chargeable to tax’ has been done away with     and accordingly, it would now be possible for Mr. Sen to plan a withdrawal of     Rs.1,00,000 from his PPF account and reinvest the same (even on the same day) to avail the benefit of deduction.

  • The total contribution to the PPF account during its 15 year term would be      Rs.15,00,000, out of which Rs.9,00,000 would have been refinanced by withdrawals. The effective contribution out of Mr. Sen’s own resources would be only Rs.6,00,000.     The interest of Rs.11,39,834 accruing in the account is totally exempt from income-tax. Even after the withdrawals of Rs. 9,00,000 (from years 7 to 15), at the end of the 15 year term, Mr. Sen would be having a balance of Rs.17,39,834 to draw on closure     of the account. 

The annual income-tax saving of Rs.30,900 on the investment of Rs.1,00,000 in the     PPF account under Section 80C would work out to Rs.4,63,500 during the 15 year PPF term.

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