REPLY :  

Notification dated 6th December 2000, has changed the situation. Now the total amount that can be invested in PPF scheme by an individual in his account and in the accounts maintained by him on behalf of minor(s) of whom he is the guardian /a Hindu Undivided Family/ an association of person can not exceed Rs. 60000 in a financial year. A declaration to this effect is also to be given at the time of opening of the account.

In case, at any time the said deposit exceeds Rs.60,000, or declaration is found to be untrue, no interest shall be payable to that person on the amount deposited in excess of the prescribed limit of Rs.60,000.

Since PPF is 15 year scheme and annual contributions are to be made to keep the scheme in force till the time of maturity, you should split the deposit in all the three accounts in such a way that the aggregate does not exceeds Rs. 60000 p.a.

REPLY :  

Investment climate would never be the same after debacle of US 64. There is a question mark on the safety aspect of financial instruments issued by Government controlled corporations and institutions on one hand and erosion of earning power of small investors on the other hand, in the falling interest rate regime.

Both RBI Relief Bonds and PPF come with sovereign guarantee and are almost 100% safe with tax-free returns of 8.5% in case of RBI bonds and 9.5% in case of PPF are most preferred investment options. Since, investment in RBI Relief Bonds are not eligible for rebate under section 88, PPF score over RBI bonds for those looking for tax savings. One can claim 20 % tax rebate on an investment of Rs. 60,000 p.a. Therefore for salary earners PPF appears to be more attractive.

Those looking for higher liquidity may however opt for RBI bonds for smaller lock-in period of five years and easy transferability. These bonds can be taken either in the form of promissory notes or Bond Ledger Account in ‘demat’ form. Bonds in the form of promissory notes can be transferred by mere delivery and no stamp duty is required at the time of transfer.

REPLY :  

Please note that enjoying benefits under the PPF scheme such as tax-free assured return and claiming tax rebate are two independent aspects.

An individual assessee may claim tax rebate under section 88 on deposit up to a maximum of Rs. 60,000 made in the PPF account standing in the name of such individual, wife or husband and any child of such individual.

In case where the assessee is a HUF, then amount up to Rs. 60,000 may be deposited by such HUF in the name of any member thereof to be eligible for rebate.

On the other hand, the PPF rules specify limits up to, which the benefits under the PPF Scheme are available to the depositor. In these rules the upper limit of Rs. 60,000 applies in case of deposit made by an individual self account and on behalf of minors /HUF/Association of Persons.

REPLY :  

Unfortunately, whole of the amount except for your own contribution made over the years would be taxable in case of premature termination.

To discuss tax liability in your case I would like to first elaborate on tax scheme applicable to unrecognised and recognised funds:

A. Unrecognised funds do not offer any tax benefit. Employee’s contribution does not get rebate under section 88. Employer’s contribution and interest thereon though not taxable on year to year basis get taxed as profits in lieu of salary at the time when lump-sum is received on retirement or resignation.
Interest accrued on account of employee’s share is also taxed as income from other sources.

B. In case of recognised provident funds, employee’s contribution gets rebate under section 88. Employer’s contribution, to the extent permissible, is exempt from tax. Interest accrued on both employers’ share as well as employee’s share (up to limits prescribed) is also exempt and any excess over this rate is to be taxed as income from other sources.

However any lump-sum received from the recognised fund at the time of retirement or resignation, shall be exempt only in the following cases: 

1. If, the employee has rendered continuous services with his employer for a period of 5 years or more, or
2. If, though he has not rendered such continuous service, the service has been terminated by reason of such employee's ill health or by the contraction or discontinuation of the employer's business or any other cause beyond employee’s control, or
3. If, on the cessation of his employment, the employee obtains employment with any other employer and the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised PF maintained by new employer.
4. Period served and contributions made in any recognised fund maintained by any former employer(s) would be counted for calculating period of five years.

C. If any lump-sum is received by an employee, in the circumstances otherwise than mentioned in para B above, the tax relief enjoyed by him till date on account of contribution made and interest accrued thereon would be withdrawn. He has to pay all taxes saved in the past, as if the fund was not recognised.

D. Unrecognised provident fund, which is subsequently, recognised offers the same tax benefits, if the amount lying to the employees account is transferred in full to the recognised fund. If only portion of the balance is transferred, then the exemption would also be proportional.

In your case the fund was recognised at a later date and I presume that whole of the balance lying to your account at that time was transferred to the recognised fund and thus no tax liability arose at that time.

However, since you resigned without completing five years with your present employer and you do not satisfy other conditions mentioned in para B, accumulated balance received by you would be taxed according to para C and A as follows:

• Employer’s contribution alongwith the interest thereon shall be taxable as profit in lieu of salary in the year of receipt. However you can claim rebate under section 89(1) as arrears of salary.
• Interest accrued and received on your contribution shall be taxed as income from other sources.
• Benefit under section 88 claimed by you w.e.f. the date of recognition of fund shall be withdrawn and you shall be assessed as if there was no rebate available to you on this account. Arrears of tax due on account of preceding years shall be payable in the year of receipt.

REPLY :  

In order to promote savings, the Recognised Provident Funds offer tax incentives to the employees, besides binding employer also to contribute for the welfare of its employees. In order to avail tax benefits, certain obligations are placed on both employers and employees. One of the obligations placed on the employee is the continuity of the service for five years or more.aIn order to promote savings, the Recognised Provident Funds offer tax incentives to the employees, besides binding employer also to contribute for the welfare of its employees. In order to avail tax benefits, certain obligations are placed on both employers and employees. One of the obligations placed on the employee is the continuity of the service for five years or more.

The accumulated balance becomes taxable if the employee has not rendered continuous service with his employer for period of five years or more, subject to following circumstances:

• If, though he has not rendered such continuous service, the service has been terminated by reason of the employee’s ill-health, or by the contraction or discontinuance of the employer’s business or other cause beyond the control of the employee; or
• If, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised Provident Fund maintained by such other employer.

However period of service with any earlier employer who had been maintaining a recognised Provident Fund should be counted for above purposes.

Since, the new job do not offer any benefit of recognised provident fund and the accumulated balance is paid to you, the tax benefits enjoyed by you on this account would lapse.

Accumulated balance i.e. the balance to your credit on the day you ceased to be an employee would normally constitute your contribution and interest thereon plus employer’s contribution and interest thereon. Income tax on the accumulated balance in such cases of premature termination shall be computed as under:

1. The tax benefit, which you might have taken under section 88 on account of your contribution to recognised provident fund in the past, shall stand withdrawn. Your income for earlier years shall be recomputed as if no rebate was available to you. Additional tax on this account shall be payable by you as income tax in the current year.
2. Employer’s contribution together with the interest accrued thereon shall be treated as profit in lieu of salary in your hands and shall be taxed accordingly in the current year. However, you can claim rebate under section 89(1)
3. Interest accrued on your own contribution shall be treated as income from other sources.

The trustees of the Recognised Provident Fund are supposed to compute your additional tax liability and deduct tax at source while making payment of accumulated balance.

REPLY :  

The accountant was at mistake for not allowing you the benefit under section 88. It is not necessary to make contributions for full year in order to avail the tax rebate. Any contribution made during the previous year would be eligible for rebate. (Rule 7 of part A of Fourth Schedule of the Income Tax Act, 1961). You may file your return showing full particulars of payments made to claim refund.

REPLY :  

In my opinion continuos service for five years is the relevant criteria for availing tax exemption under section 10(12) in case of the termination of participation into a recongnised provident fund even though the contribution has been made for period less than five years.

REPLY :  

When an employee voluntarily resigns from the company before completion of 5 years, he forfeits the tax concession availed by him in the earlier years on account of P.F. Contribution. Thus you would be liable to pay additional tax on three accounts:

i. Forfeiture of tax concession on account of your own contribution, availed u/s 88. You may claim benefit under section 89(I).

ii. Interest accrued on your share of contribution is taxable as income from other sources.

iii. Employer's contribution over these years plus interest thereon would be considered as perquisite in lieu of salary and would be taxable in your hand in the year of receipt.

REPLY :  

The Deposit Scheme for Retiring Public Sector Employees runs for three years but you can make premature withdrawal of the principal amount after expiry of one year from the date of deposit. However you would loose on interest and would be paid interest at a reduced rate of 4% p.a. only. Excess paid earlier, if any would be adjusted at the time making the premature payment.

As far as PPF account of your wife is concerned you have not stated whether she has opted for extension of scheme beyond 15 years, for further block of five years Or she is simply using the PPF account as an investment vehicle.

In case she has opted for the extension and is making contributions as per the scheme then she is eligible to make partial withdrawal subject to the condition that the total withdrawals during the five year period shall not exceed 60 % of the balance at her credit at the commencement of the five year block.

On the other hand, if she is maintaining the PPF account beyond fifteen years, without making any fresh contributions only as an investment vehicle, then she will be allowed to make full withdrawal.

Both, the Deposit Scheme for Retiring Employees and the PPF scheme, stipulates only one withdrawal in a calendar year. Therefore, carefully plan your withdrawals and utilisation of money to minimise the interest loss.