One of India’s most common ways to put money aside is through the Public Provident Fund, also known as a PPF. Tax benefits on the amount invested, guaranteed returns, and tax-free returns are just a few of the reasons PPF is so popular.
Although many Indians use PPF investments to save on taxes in the long run, there are still some misconceptions about the scheme. This article will cover the most important aspects of the Public Provident Fund.
Potentially Favorable Tax Treatment for a PPF Investment
Exempt, Exempt, Exempt (EEE) treatment is available for PPF accounts:
- First Exemption: One of the main benefits of PPF is that the investment’s principal amount is not taxed. Section 80C of the Income Tax Act says you can get a tax exemption if you put money into a PPF.
- Second Exemption: Tax-free interest accrued on a PPF account is the second exemption.
- Third Exemption: Funds received at PPF account maturity qualify for the exemption. When your PPF account matures, you can withdraw the funds without being subject to either the capital gains tax or the wealth tax.
However, as of 2020, tax deducted at source (TDS) may apply to PPF withdrawals. Withdrawals from small savings schemes like PPF exceeding Rs. 20 lakh are subject to tax withholding rates of 2% and 5% under the new law. The PPF subscriber will only be subject to this TDS if they have not filed an income tax return in the preceding three years.
How long does a PPF account last?
Everyone knows that your PPF money must be spent within 15 years. What’s less well-known, though, is that this maturity time is not counted backward from the day the account was opened. An individual’s PPF account will mature 15 years after the close of the fiscal year in which the initial contribution was made. Therefore, you will need to make 16 annual contributions to your PPF account instead of 15 to see it through to maturity.
PPF Account Extension After Maturity
After 15 years, the PPF account is considered mature, and the owner can withdraw the funds or make one of two investments.
- Your first choice is to cash out the account’s funds and close them.
- The second choice is to let the account mature with or without further deposits.
Under the current laws, a mature PPF account can be extended for an additional five years without limit. A PPF account can be extended for up to one year after its maturity date, but only if the request is made during that year.
Minimum and Maximum Contribution to the PPF
To comply with the current PPF regulations, a minimum annual deposit of Rs. 500 is required. Currently, the limit for PPF contributions per year is Rs. 1.5 lakh. Though this maximum yearly contribution of Rs. 1.5 lakh is subject to periodic adjustment. Public Provident Fund deposits over Rs. 1.5 lakh per year is considered irregular and will be returned to the subscriber without interest.
Withdrawal of Part of the PPF Account Balance
Subscribers can start making partial withdrawals from their PPF account after five fiscal years have passed. However, this time frame of 5 years is measured from the end of the fiscal year in which the initial payment was made.
After the beginning of the 7th year of the PPF account, measured from the date of account opening, a partial withdrawal of the PPF balance is permitted. PPF withdrawals are subject to eligibility requirements, such as:
- There is a yearly limit of one withdrawal.
- Subscribers cannot take out loans against their PPF balances once they have withdrawn their funds.
- If you have a PPF account, you can take out no more than half of your account balance from the previous fiscal year.
Loan Against PPF
Subscribers can ask for a loan against their PPF between their account’s third and sixth years. Borrowers can currently borrow up to 25% of their PPF account’s closing balance from the previous year for the financial year in which the loan application is made.
Let’s say that in August 2021, a PPF subscriber seeks a loan secured by their PPF. A maximum loan amount of 25% of the PPF account balance as of March 31, 2021, would be available in this scenario.
Loans secured by PPF carry an interest rate of 1% over the current PPF rate. Therefore, a loan taken out against a PPF account will incur an interest rate of 8.1% p.a., based on the current PPF interest rate of 7.1% p.a.
Attaching the PPF account to repay debts
Court orders or decrees cannot be used to seize a PPF account or its balance to satisfy the subscriber’s debts or liabilities. Debtors may be denied access to their PPF account; however, the Internal Revenue Service is not subject to this restriction.
If the IT Department issues a subscriber with a tax-related order, the subscriber authorises the IT Department to use the PPF account balance to satisfy the demand.
Additional PPF Account
There can only be one PPF account under an individual’s name. Subscribers who open multiple PPF accounts will have the second account treated as an irregular account and will not get the tax benefits or interest earnings associated with PPF accounts.
Currently, subscribers can open PPF accounts at any participating bank or any participating post office. It’s also possible to open a PPF account at many banks via their websites.
The requirements for opening an online PPF account with a bank include:
- Keeping money in a bank savings account
- A valid username and password for an online banking service
- Indicative of Authenticity and Relationship (Aadhaar)
- One-Time Password (OTP) from Aadhaar sent to a mobile number tied to Aadhaar
Overall, PPF is an intelligent way to save, especially if you want to put aside money for the future. In the long run, it can be used for many different things, from starting your own business to paying for your children’s education.
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