No contribution in PPF leads to closure of it

Regarding fixed maturity plans (FMPs) of mutual funds, I want to know whether the capital gain is taxed at source or not?

?Udit

No, in case of all schemes of all mutual funds, whether equity based or non-equity based, the capital gain is not taxed at source for resident investors. However, for NRIs, the long or short-term capital gain on non-equity based schemes and the short-term capital gain on equity-based schemes is taxed at source. Of course, the long-term capital gain on equity-based schemes is tax-free for residents and NRIs alike.

I have a query and require your advice.

A PPF account was opened on March 1991 with the State Bank of India. After its maturity period of 15 years, I forgot to apply for renewal and continuance of the account due to genuine oversight. Recently, when I went to the bank to deposit subscription for the year 2007-2008, they refused to accept, pointing out that the account was not renewed on time and that I have to close it and open a fresh account. When I enquired with them, whether in the fresh account will they carry forward the accumulated credit balance in the earlier account, their answer was no and as per ceiling the maximum of 70 k could only be accepted.

What I would like to know is whether the bank has no power/authority to condone such genuine mistake, which is only technical in nature and allow the depositor to renew and continue the account?

Are they not vested with some discretionary powers, as they state that about 7,000 of their branches are handling government related matters such as PPF/Income Tax/Service Tax etc. Are they right in refusing to accept my plea to condone the delay in renewal? Please advise.

?Amit Kulkarni

Yes, the bank is right.

Your account matured on April 1, 2006. It appears that you have not contributed any amount for the FY 06-07. If you had contributed, the bank would have asked you to fill Form-H for continuing the account for the block period of five years. In other words, you have neither filed Form-H nor made any contribution for the year. Therefore your account will be treated as a without-contribution account extended for a block of five years.

In the case of account extended without contribution, withdrawals can be affected in installments, not exceeding one in a year. The balance will continue to earn interest till it is completely withdrawn.

No new account can be opened if the old one is in extended mode either with or without contributions.

Fresh contributions made to such accounts will enjoy neither the deduction u/s 80C nor the interest. [MoF (DEA) 7/21/88-NS-II dated 10.8.90]. As and when the mistake comes to the notice of the accounts office, the amount contributed without any interest will be returned to the account holder.

You should consider yourself lucky in having come to know this rule early. Some of our readers have reported that their accounts office noted the default after two extended blocks!!

The bank has no discretion in this matter. As per the rules, if an account holder has failed to file the form, he can approach ministry of finance (MoF) and pray for getting the account regularised. Unfortunately, in practice, you may find that mode of action cumbersome to say the least.

Recently, I read an article that stated that the perquisite value of employer provided accommodation has been reduced from 20% to 15%. However, the same did not state the source of this information. Can you please clarify the rule or provision where this amendment can be found? I have been unable to locate it.

?Upendra

This provision is contained in Sec 17(2)(ii) of the Income Tax Act. Please refer the latest version as the amendment was inserted by Finance Act, 2007.

Is it possible to get back deposit money without paying income tax under NSS-87? I am now a retired person.

?Sriniketan

As per NSS-87 rules, if the withdrawal amount is Rs. 2,500 or more during any financial year, the TDS rate is 20%. Note that since the amounts can be withdrawn only in multiples of Rs 100, the effective threshold for TDS is Rs 2,400. The withdrawn amount is treated as income.

A nice strategy for unlocking the funds from NSS-87 can be used by those whose income has fallen below the tax threshold. The focal point of the strategy is built around withdrawing only that much part of the balance from NSS, which, along with your other income takes you very near the tax threshold. Even beyond this limit, you can withdraw up to Rs 1 lakh and reinvest the same amount in PPF and other avenues u/s 80C and still remain in the non-taxable zone. The withdrawal adds to your income to bring you in the tax zone and the reinvestment in avenues u/s 80C reduces the income to below tax threshold. This strategy is more potent after retirement and also for senior citizens and now for junior female assessees.

A word of caution, the 7.5% tax-free interest is quite attractive, especially for high net worth individuals and most importantly, payment made to the legal heir of the account holder is not subjected to any tax.

?The authors may be contacted at wonderlandconsultants@yahoo.com