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With exemption of interest & deduction for investment PPF can effectively yield a return of upto 16.75% !

        Section 80C of the Income-tax Act was amended by the Finance Act of 2005 with effect from Financial Year 2005-06, permitting an individual and HUF to avail of higher deduction for specified investments and allocations of upto Rs.1,00,000, revising it upwards from the earlier limit of Rs.70,000. 

        However, even after six years of the aforesaid amendment under the tax laws, the erstwhile limit of maximum investment under the Public Provident Fund (PPF) Scheme during a Financial Year having not been revised, it still continues to be Rs.70,000 only. As a result, for availing the full benefit of deduction of Rs.1,00,000 under Section 80C, a taxpayer is required to look at other avenues of savings, investments or allocations after exhausting his choice for PPF investment of Rs.70,000.

        Infact, in September, 2008, the Karnataka High Court even entertained a public interest writ petition that came to be filed in the case of M. S. Padmarajiah vs. Secretary, Department of Finance (183 Taxman 209), wherein the petitioner had raised the contention that in view of the amendment to Section 80C, the concerned authorities should have amended Paragraph 3 of the PPF Scheme to raise the relevant limit for investment to Rs.1,00,000. Appreciating the merits of this plea, the High Court held that it would meet the ends of justice if the respondents are directed to do the needful to amend the PPF Scheme within three months from the receipt of its order and also directed accordingly. Unfortunately, nothing really happened!

        Almost three years thereafter on 6th September, 2011, the Minister of State of Finance, while replying to a question in the Rajya Sabha, informed that the Committee on Comprehensive Review of National Small Savings Fund (NSSF) headed by Deputy Governor, RBI has recommended increasing the deposit limit under PPF Scheme from existing Rs. 70,000 to Rs. 1 lakh per annum.

         PPF investors can only keep their fingers crossed and earnestly hope that the announcement made by the Minister in the Parliament is implemented at the earliest!


        8% interest on PPF is what everyone calculates, when thinking of return on investment.  However, few 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.70,000 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 16.75% in cases of taxpayers in the top tax bracket of 30.9%.

         Let us see how the PPF magic works, 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 earns interest of Rs.5,600 at 8% on his PPF investment of Rs.70,000.  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 11.58% or Rs.8,104. This is on the basis that if Mr. X had earned Rs.8,104 at 11.58% on Rs.70,000, after paying tax at 30.9%, he would have retained Rs.5,600.

        However, the PPF thrill doesn’t end here.  The interest of Rs.5,600 earned by Mr. X should be evaluated on his effective investment in PPF, which is not Rs.70,000, but after considering the tax saving of Rs.21,630 on account of deduction under Section 80C (30.9% of Rs.70,000), the same actually works out to only Rs.48,370 (70,000 – 21,630).

         Now, lets compute what Rs.8,104 (pre tax return on PPF) translates in terms of return on the effective investment of Rs.48,370 as explained hereinabove.  Wow!  That actually works out to 16.75% 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 9.94% and 12.70% respectively.

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