PPF
or Public Provident Fund is a small savings scheme with the objective to get
people to save funds for their retirement. The PPF account has an initial lock
in period of 15 years which can be extended in blocks of 5 years at a time. In
spite of the lock in period, this scheme is one of the most popular schemes
among the public, primarily for the rate of interest and the tax benefits on
the scheme. It is very easy to open PPF account online and offline. To open PPF
account online, you need to fill up an account opening form on the website of
the bank and deposit your first contribution and the formalities will be
processed by the bank. You can also visit a bank branch, fill up an account
opening form.
To promote a saving habit among the people, the Government gives tax incentives on a PPF account. It is important to understand these tax benefits so that you can plan for your investments. Knowing the impact of taxation on your investments can help you plan the right amount that you can invest and also how long you should stay invested in the scheme.
The tax benefits of a PPF account can be divided into 3 parts depending on the three stages of investments:
Investment Stage: Any investment made in a PPF account gets a deduction under Section 80C of the Income Tax Act up to Rs. 1,50,000. The minimum deposit amount is Rs. 1,000. This amount is deducted from the gross taxable income of the depositor. However, this deduction competes with the other deductions in Section 80C. There is no other special section and benefit carved out for PPF. This investment or contribution can either be made in a lumpsum amount or through deposits throughout the year. The scheme does not distinguish between that.
Accrual Stage: Interest on a PPF account is calculated monthly and credited to the account at the end of the year. The interest earned on PPF is exempt from tax. This means it is not considered as taxable income and does not affect your tax slab. However, exempt income has to be declared in the Income Tax Return. This is a departure from the tax treatment for other instruments like National Savings Certificate or Senior Citizens Savings Scheme (SCSS) which provide a deduction at investment stage but the interest income is taxable. The PPF returns increase significantly because the interest income is not taxable. Over a 15 year lock in period, this interest compounding helps to grow capital at a faster rate.
Withdrawal Stage: The withdrawal for NPS is exempt up to 60%. This means 40% of the withdrawal is taxable and the investor has to pay tax on this at slab rates. However, in case of PPF, the entire withdrawal amount is exempt from tax which means it is not considered a part of the depositor’s income.
This triple tax advantage on a PPF investment makes it one of the most popular investment options till date.
To promote a saving habit among the people, the Government gives tax incentives on a PPF account. It is important to understand these tax benefits so that you can plan for your investments. Knowing the impact of taxation on your investments can help you plan the right amount that you can invest and also how long you should stay invested in the scheme.
The tax benefits of a PPF account can be divided into 3 parts depending on the three stages of investments:
Investment Stage: Any investment made in a PPF account gets a deduction under Section 80C of the Income Tax Act up to Rs. 1,50,000. The minimum deposit amount is Rs. 1,000. This amount is deducted from the gross taxable income of the depositor. However, this deduction competes with the other deductions in Section 80C. There is no other special section and benefit carved out for PPF. This investment or contribution can either be made in a lumpsum amount or through deposits throughout the year. The scheme does not distinguish between that.
Accrual Stage: Interest on a PPF account is calculated monthly and credited to the account at the end of the year. The interest earned on PPF is exempt from tax. This means it is not considered as taxable income and does not affect your tax slab. However, exempt income has to be declared in the Income Tax Return. This is a departure from the tax treatment for other instruments like National Savings Certificate or Senior Citizens Savings Scheme (SCSS) which provide a deduction at investment stage but the interest income is taxable. The PPF returns increase significantly because the interest income is not taxable. Over a 15 year lock in period, this interest compounding helps to grow capital at a faster rate.
Withdrawal Stage: The withdrawal for NPS is exempt up to 60%. This means 40% of the withdrawal is taxable and the investor has to pay tax on this at slab rates. However, in case of PPF, the entire withdrawal amount is exempt from tax which means it is not considered a part of the depositor’s income.
This triple tax advantage on a PPF investment makes it one of the most popular investment options till date.
