The one scary aspect of the budget this time was the rumors that PPF withdrawals may be taxed. Fortunately these rumors turned out to be untrue, but I have had several questions from people asking if I have changed my opinion on PPF being the best investment in the debt space. After giving due consideration to all aspects, my opinion is that PPF remains the best instrument in the debt space, only bettered by SSY for people who have a girl child below the age of 10. As i have written several posts on PPF earlier, I am not going to explain the features and benefits of PPF here – do read those posts if you are interested.
Let me start by the fundamental issue first. Even though PPF has been spared this time, is it likely that it may be taxed in the future? I think the answer to this question is YES. Even though it is going to be a politically difficult decision to tax PPF withdrawals, it is likely that at some point in time the government will have to do it. This has been a suggestion made long back by the Kelkar committee and I think the EET treatment will be finalized in some years to come, maybe sooner than later.
Why then do I say that it is still the best instrument? Well, my reasons are as follows:-
- Whenever the PPF withdrawal becomes a tax liability, it will always be with prospective effect. For example, if it were to become taxable from the next FY then your accumulated amount in PPF account could still be withdrawn without any tax impact. So, there is absolutely no need to close your PPF accounts thinking that you may need to pay taxes on your current corpus.
- As was explained in the case of PF, even when PPF withdrawal is taxable, you will be having tax liability on 60 % of the interest. The principal amount as well as 40% of the interest continues to be tax exempt.
- The flexibility associated with PPF means you can stop your contribution at any time and also withdraw in a phased manner. When you are not having active income your PPF withdrawal can be phased, so as to ensure you minimize your tax impact.
Based on the above, I do not see any need to change the PPF strategy that I had advocated earlier. In fact, this is how I plan to use PPF for my own purpose:-
- Continue investing 1.5 lacs every year for both myself and my wife. This will either come from some active income through consultancy or from FMP redemption.
- I do not see a need for any withdrawals now, but may start to do so after another 5 years, for my discretionary expenditure.
- In my case, I will stop the contribution or reduce it when the interest on fresh contribution becomes taxable to the extent of 60%. However, this is purely due to my stage in life. Anyone below 45 or so, should logically keep contributing.
That in essence is what most of the readers should do also. There is no real need to be in a tizzy due to the confusion in the budget. PPF remains the best investment of it’s kind, continue to invest in it with confidence.