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PPF savings may be taxed on maturity
February, 21st 2007

There is a chance you may soon have to make some changes in how you plan your finances. Sources say the government may reopen a proposal to levy a tax on your savings in totally tax-free instruments like the Public Provident Fund (PPF) and equitylinked savings schemes (ELSS) offered by mutual funds. This, sources said, will be done by introducing a new tax called exempt-exempt-tax (EET).

In this regime, contributions to tax savings instruments are exempted (E) from the taxable income. The interest earned on these contributions will also find exemption (E). But at the time of maturity, these contributions will be taxed (T).

This is in contrast to the current EEE or exempt-exempt-exempt regime where contributions to tax-saving investments are exempt from taxes at all stages.

Sources said the finance minister may kick off EET in a phased manner by first covering non-compulsory schemes like PPF and ELSS with prospective effect. What it means is that future investments in PPF and ELSS may be subject to tax at the time of withdrawal beginning April 1.

But both these instruments are likely to have a lock-in period of five years. Subsequent to this, its expected that investments in Employees Provident Fund and pension schemes along with National Savings Certificate, post office savings, bank deposits, securities of Central government, bonds of infrastructure companies and even insurance policies may find their way into the EET net.

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