Tax planning in 2009

The various tax-saving avenues under Section 80C can be used by individuals to suit their financial needs. We analyse the available options.

Babar Zaidi        Print Edition: January 22, 2009

The various tax-saving avenues under Section 80C can be used by individuals to suit their financial needs. We analyse the available options.

This is everybody's favourite tax-saving option and it's no surprise. The Public Provident Fund (PPF) offers tax exemption on the invested amount, there's no tax on the interest earned, and even withdrawals are tax-free. Most importantly, the PPF is a government-sponsored scheme and is, therefore, completely safe.

The other huge attraction of the PPF is that you can take a loan from the account in the third year or make partial withdrawals after the sixth year. The loan can be up to 25% of the balance in the account and has to be repaid in not more than 36 EMIs. Of course, if the thought of paying a 12% interest on your own money is galling, you can opt for a partial withdrawal after the seventh year.


The old faithful | Maximum limit: Rs 70,000

Not locked up for 15 years
 When possibleLimit
LoansIn 3rd financial year25% of balance in account at end of first year
Partial withdrawalsIn 7th financial year50% of balance in account 3 years
previously or in previous year
March 31 is the cut-off date for calculating the balance for the year.

You can withdraw up to 50% of the balance in the account that was present three years previously or in the previous year, whichever is lower. The end of the financial year (March 31) is taken as the cut-off date for calculating the balance. So, if a PPF account was opened in 2002-3, then the first withdrawal can be made during 2008-9 and the amount will be limited to 50% of the balance on 31 March 2005 or 31 March 2008, whichever is lower. This facility is particularly useful if you're facing a cash crunch. Simply withdraw from the PPF account and reinvest.

However, don't go overboard while investing in PPF. In the long run, its returns will never be able to match the phenomenal potential of an equity-based option. If you can stomach a little risk, don't put too much in this low-return avenue.


  1. Completely safe
  2. 8% assured returns
  3. Income is tax-free
  4. Contribution is flexible


  1. Returns lower than prevailing FD rates
  2. Withdrawals limited
  3. Locks up capital for the long term

Best Suited For

Risk-averse investors, self-employed professionals and those not covered by the EPF.



Returns are high, but taxable | Maximum limit: Rs 1 lakh

Best five-year FD rates
BankInterest Rate (%)Post-Tax Yield (%)
Oriental Bank of Comm9.07.85
Indian Overseas Bank9.07.85
Bank of Baroda8.57.32
Axis Bank8.57.32
Post-tax yield for an investor in the highest tax bracket

Never judge a book by its cover, they say. Or the suitability of an investment option by its advertisement. Banks are crying themselves hoarse with offers of attractive rates of interest on fixed deposits.

At 9%, the returns offered are higher than what your PPF contribution earns. But then, as another cliché goes, if it's too good to be true, it probably is. In this case, the income earned on the fixed deposit is taxable; it is added to your income for the year and is taxed at the applicable rate. So, if your income is in the 30% tax bracket, the post-tax return from the fixed deposit is actually lower than what the PPF offers.

There's also the vital issue of safety. Banks are perceived as safe havens. But in 2008, we saw that even these safe havens can fall. So, steer clear of little-known private and cooperative banks that offer great rates. If they fold up, your money is gone. Stick to public sector banks and well capitalised private entities. They might offer rates that are a tad lower, but at least your capital will be safer.

Fixed deposits are suitable for retired taxpayers and those with an income of less than Rs 3 lakh a year. At that income level, the tax rate is only 10% (plus 3% cess), which still leaves a lot on the table for the investor. Retirees have another option in the Senior Citizen's Savings Scheme.


  1. Attractive returns of 9%
  2. Widely available
  3. Shortest lock-in (5 years) among debt options


  1. Income is taxable
  2. Safety not assured
  3. May not match returns from equity over 5 years

Best Suited For

Senior citizens who don't want to go in for long-term options; those in low tax bracket.

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