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Bank fd and ppf

meabhijit (Project Manager) (172 Points)

28 January 2012

Need expert inputs for below.

Supposed I invest 10Lakh in FD at 10% interest and divert the intrest amount without paying TDS or tax to PFF. Do I need to pay tax on the interest earned (1lakh).

FD: 10,00,000
Intrest: 10%
Tenure: 1year
Intrest earned: 1,00,000

Invest 1,00,000 in PPF since EEE. Basically, my assumption is that investments/contributions in PPF (till 1lakh) would be considered tax free since EEE.
Hence I avoid paying any TDS or tax on the generated income from FD. Is this valid to avoid tax?

If the above is not valid, what does "E"EE (Exempt for invest) indicate? How is that useful to tax payer?

Thanks.

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8 Replies

CA Suraj Lakhotia (IndigoLearn) (4898 Points)
Replied 28 January 2012

Assuming you have no other income then, the amount you have earned is below the taxable limit and hence no tax is applicable.

If you have other incomes as well then,, you need to add up all your income and take deduction of Rs. 1,00,000/- invested in PPF under section 80C.

Normally banks deduct TDS on interest of FD if it exceeds the minimum threshold limit.

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Sohil (Learner) (631 Points)
Replied 28 January 2012

Most countries follow EET model.India still has EEE model. As CA suraj mentioned if your overall income from salary,business whatever plus interest on fd comes below basic tax limit of 1 lakh 80k than surely no tds should apply as ultimately no tax liability happens on you. But if its more than 1 lakh 80000 than you cant avoid it. Also i guess in bank FDS even if you fill 15g form and your yearly interest in fds crosses 50k no matter TDS will be deducted anyhow. Its better to avoid such practice or better open fds in chunk in 2-3 banks.

meabhijit (Project Manager) (172 Points)
Replied 28 January 2012

Thanks Suraj Sohail. My question is more towards diverting income till 1lakh (since PPF now provides EEE till 1Lakh) from bank deposit to PPF making it tax free income. I agree to other views regarding IT tax limt of 1lakh under 80C and 15G form etc but my primary question is how can EEE of ppf/pf (in specific Investment/contribution to ppf/pf as "E"EE) help to mitigate tax?

CA Suraj Lakhotia (IndigoLearn) (4898 Points)
Replied 28 January 2012

The total amount of deduction available under Section 80C, 80CCC and 80CCD is Rs. 1,00,000/-. PPF contribution is allowed under section 80C.

You cannot claim the entire interest to be exempt on the grounds that you are depositing Rs. 1 lakh which you earned in PPF. The benefit of deduction as I mentioned above is available from Gross Total Income.

The first "E" actually refers to deduction. Usage of Exemption technically may be a misnomer. What we get is deduction from total income and not exemption. The incomes which are exempt are separately dealt with by section 10 of the Income Tax Act.

For instance LTCG on payment of STT is exempt. So, if you pay STT, the income itself is exempt. Whereas in case of 80C, whatever you invest is given to you as a deduction from Gross Total Income.

To your question of how it helps to mitigate tax, the answer is whatever you invest (up to 1lac) will be reduced from your income thereby reducing the tax liability. However, you cannot use 80C to seek exemption from a source on a stand alone basis.

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Sohil (Learner) (631 Points)
Replied 28 January 2012

Your question is I make fd of 10 lakh and interest of 1 lakh which you earn on that you have a feeling if you forward it to ppf and since it follows EEE model hence no tax should be liable on it. Well bro.It doesn't work that way. Ca gave the correct answer.Its deduction from gross not exemption

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meabhijit (Project Manager) (172 Points)
Replied 29 January 2012

Thanks Suraj, Sohail. I get the picture now. The word Exemption is misleading. It should be Deduction instead.

Sohil (Learner) (631 Points)
Replied 29 January 2012

Yes Even more clarity.A small example.

Suppose you make an fd of 10 lakh amount whose interest is 1 lakh per year.Which you forward into PPF.

And suppose your gross income is 4 lakh rupees as salary and you a male less than 60 years age.

Than other income will be 1 lakh of bank fd also plus say 20k as bank interest on savings.

So total gross is 4 lakh + 1 lakh fd income +20k bank interest.

You cant say straight that it goes into PPF so its exempted totally.And you make new investment into 80c related instrument.

Even if that is done.Your 80c investment option gets completed as thats forwarded to ppf .Now you cant invest(literally speaking you can but wont get more deduction over 1 lakh invested or used in some other 80c instrument). into another 80 c instrument and claim deduction.

U S Sharma (glidor@gmail.com) (21056 Points)
Replied 30 January 2012

Bank will not consider the fact that the interest amount is gone to PPF and they will deduct TDS as usual, however you are eligible to claim back the TDS on the ground that the amount gone to PPF.