Kolkata: PPF, NSC, ELSS and endowment insurance policies — these are financial instruments that many of us invest in. While many do them for tax saving in the old system (under section 80C of the Income Tax Act), these also have a completely different utility, which most of us are not aware. That is: these can bail us out of temporary cash crunches. Let’s have a closer look as to how one can withdraw money from these to address liquidity concerns without surrendering or breaking the investment.
Public Provident Fund
Section 80C of the Income Tax Act stipulates that one can deposit a maximum of Rs 1.50 lakh annually into a PPF account and get tax deduction from it. The tenure of a PPF account is 15 years, which can be extended by multiples of five years. One can withdraw money from it once a year. The amount is limited to a maximum of 25% of the account balance from the two years prior to that year in which the withdrawal is being made. For example, if you apply for a loan in the third year, you can get up to 25% of the balance from the two years prior. If the account is less than five years old, the withdrawal is regarded as a loan.
If the account is more than five years old, you can make partial withdrawals without the need to repay the withdrawn amount. The withdrawal limit is up to 50% of the balance at the end of the fourth year or the balance at the end of the year immediately preceding the withdrawal, whichever is lower.
National Savings Certificate
The National Savings Certificate or NSC is a key tax-saving instrument under Section 80C. It has a five-year term. Usually NSCs cannot be redeemed before maturity. But if you need cash, you can take a loan by pledging NSCs from a bank or NBFC. Banks typically offer loans of 70-80% of the face value of NSCs. The interest rate depends on the bank and the prevailing interest rate cycle. For example, SBI offers loans against NSCs at 11.20% interest.
Equity Linked Savings Scheme
ELSS is a mutual fund tax-saving scheme that is eligible for investment exemption under Section 80C. The lock-in period is three years. You can redeem your units at any time after three years, but the decision to redeem depends on market conditions. If market returns are not favorable after three years, you can wait instead of withdrawing immediately. Importantly, you can redeem your old ELSS investment and reinvest on the same day. This process makes you eligible for tax benefits under Section 80C again without investing any additional funds. Furthermore, some banks also offer loans based on the NAV of these investments.
Insurance policies
If you have a traditional (endowment) life insurance policy, you can take a loan against it, provided it has accumulated a paid-up value. Loans are typically available after five years for regular premium policies. This loan is based on the policy’s surrender value. It’s important to note that loans are not available against term life insurance policies, as they are a pure insurance product and do not include any savings or investment component.