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Public Provident Fund (PPF), a government-backed long-term investment scheme, is one of the favourites amongst Indian nationals to invest their hard-earned money and get assured returns. With a maturity period of 15 years, the PPF offers a number of tax benefits with minimal risk. With the ability to meet the long-term investment requirements of individuals from different financial backgrounds, PPF should be on your list of investments. Read ahead to know about PPF and find out if PPF interest is taxable.
Understanding PPF
Public Provident Fund is one of the most popular investment schemes in India as it offers long-term benefits with minimal risk as it is backed by the government. As of Q2 2022, PPF interest rate is 7.1% rate per annum and the minimum amount is just Rs. 500 annually. Any Indian resident can sign-up for a PPF account with by filling out and submitting Form 1.
Below are few key features of a PPF account:
Interest rate (as of Q2 2022) |
7.1% per annum |
Minimum account opening amount |
Rs. 100 |
Minimum annual investment |
Rs. 500 |
Maximum annual investment allowed |
Rs. 1.5 Lakh |
Account Maturity |
15 years |
PPF interest taxable |
No |
Maximum people invest in PPF as offers tax-free returns that can be used for various purposes including creating a corpus for retirement. As the PPF is a government-backed scheme, there are zero chances of losses even if the market fluctuates. The government of India sets and reviews the interest rate for PPF once every quarter.
Is PPF Interest Taxable?
Investors prefer Public Provident Fund because it falls under the Exemption- Exemption- Exemption (EEE) category so, the answer is no to whether the PPF interest taxable or not. The first exemption is on the deposits you make in a PPF account. Deposits to a PPF account are exempted from the taxation up to a maximum of Rs. 1.5 lakh in a FY under Section 80C of the Income Tax Act, 1961. A Tax saving fixed deposit has a higher interest-earning potential than savings accounts.
The second exemption is on the interest earned from your PPF deposits. So, if you are wondering if PPF interest is taxable or not, the answer is no, it is tax exempt.
Is PPF Interest Taxable?
Investors prefer Public Provident Fund because it falls under the Exemption- Exemption- Exemption (EEE) category so, the answer is no to whether the PPF interest taxable or not. The first exemption is on the deposits you make in a PPF account. Deposits to a PPF account are exempted from the taxation up to a maximum of Rs. 1.5 lakh in a FY under Section 80C of the Income Tax Act, 1961.
The second exemption is on the interest earned from your PPF deposits. So, if you are wondering if PPF interest is taxable or not, the answer is no, it is tax exempt.
The third tax exemption of PPF is on the maturity amount. When the PPF account matures after 15 years, the maturity proceeds you receive at withdrawal will also be exempt from tax. Considering the EEE benefit offered by the Public Provident Fund, it is definitely one of the best options for generating long-term savings.
Tax Benefits & Features of PPF
The PPF contributions of up to Rs. 1.5 Lakh in a financial year are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. The account holder can claim for the deductions within the given limit.
With a PPF account, you get triple benefits and a lot more. Here are the reasons why PPF is the best tax-saving scheme for you-
1. Get triple exemption
You get tax exemption on the investment, interest rate, and withdrawal amount with the exemption- exemption- exemption status. So, your total accumulated corpus will be free of tax deductions, and you will get to keep the whole amount.
2. Increased compounding
Once you start investing, your PPF account will mature in 15 years. If you decide to extend the maturity period, you will get 5 more years. Now suppose you invest Rs. 60,000 every year for the next 15 years with an interest rate of 7.1 %, you will get Rs. 7,27,284 as the interest rate, and the total amount will be Rs. 16,27,284 upon withdrawal.
If you extend for the next 5 years, you will get Rs. 20,63,315 as the maturity value. Also, because you get an exemption from tax, there will be no tax deduction making it the safest scheme in the market.
3. Best investment if you fall in the heavy tax bracket
With the income tax rate at 30%, it is the best scheme to invest even for investors under the heavy income tax bracket and high salary bar. If you are someone who matches this criterion, then you may have other avenues to invest in to build corpus money, but because of tax exemption, the PPF scheme is far more appealing than others.
4. Investment portfolio stability
Even if you prefer to invest in different funds and have an appetite for risk and mint money, investing in the PPF scheme will stabilise your portfolio. It will bring maximum returns to your portfolio's debt section.
5. Play safe with PPF
In case you are someone who wants to invest money where there is zero loss and maximum returns, the government backed scheme is a haven for you to dabble in. Currently, leading banks are offering interest rates between 4-5%, and the PPF gives an interest rate of 7.1% with zero tax deductions.
Though many other government-run schemes have higher interest rates, they are meant for specific purposes and eligibility criteria.
Factors to Consider When Investing in PPF
Like every financial scheme, there are some factors you need to consider before investing in the public provident fund scheme. Check them out:
1. 15-years lock-in period
PPF account matures after 15 years and even though are ways to make partial withdrawals before maturity, there are various restrictions on complete withdrawal or closure of PPF account prior to maturity. So, PPF is mainly for those planning to build a tax-free corpus for achieving long-term financial goals such as securing post-retirement finances.
2. Guaranteed Returns
Like every financial scheme, there are some factors you need to consider before investing in the public provident fund scheme. Check them out:
1. 15-years lock-in period
PPF account matures after 15 years and even though are ways to make partial withdrawals before maturity, there are various restrictions on complete withdrawal or closure of PPF account prior to maturity. So, PPF is mainly for those planning to build a tax-free corpus for achieving long-term financial goals such as securing post-retirement finances.
2. Guaranteed Returns
As mentioned earlier, Public Provident Fund is a government-backed scheme, and the returns from PPF investments are assured by the Government of India. This makes PPF a suitable investment for risk-averse investors seeking guaranteed returns. What’s more, the interest rate of the scheme is also decided by the Government of India and reviewed on a quarterly basis. As of Q2 2022, PPF interest rate is 7.1% p.a. compounded annually.
3. Tax Benefits for All Investors
Due to the EEE status of PPF investments, it provides tax benefits to investors irrespective of the tax bracket they belong to. For investors in the highest 30% tax bracket, annual PPF investment to the maximum limit of Rs. 1.5 lakh in a FY can reduce tax liability by up to Rs. 45,000 in a year plus cess. As a bonus, the maturity amount of PPF will also be completely tax-free.
4. Benefit of Compounding
To get the maximum benefit of compounding, you need to stay invested for the long-term so that your investments get more time to grow. The 15-year maturity of PPF account facilitates long-term investments and makes the power of compounding work in your favour. What’s more, you also get the option of extending the account in additional blocks of 5 years after it matures to continue earning tax-free returns and get even more benefits of compounding.
5. Offers One of the highest interest rates
Among government-backed tax saving investments, PPF interest rate is among the highest among assured returns schemes which makes it one of the most lucrative investments in India. While some investments like Employees Provident Fund (EPF), Voluntary Provident Fund (VPF) and Sukanya Sammridhi Yojana (SSY) do offer higher returns with similar benefits, there are various limitations with respect to eligibility for these schemes.
FAQs
1. Is PPF interest taxable?
The answer is no to whether PPF interest is taxable or not. PPF falls under the exempt- exempt-exempt (EEE) category. This means, the principal amount, the interest earned and the maturity amount of PPF is completely tax-free.
2. Can I open my PPF account in a post office?
You can easily open your PPF account in a post office with just Rs. 100. You can start investing from Rs. 500 to Rs. 1.5 Lakhs per annum. You are not allowed to deposit more than Rs. 1.5 Lakh per year in your PPF account under any circumstances.
3. In case of market fluctuation or economic instability, will my PPF interest rate suffer?
The government reviews the PPF interest rate every quarter. So, your PPF interest rate can be impacted by factors such as economic conditions, current interest rate regime, etc. But once the rate is declared by the government, PPF returns are assured at the applicable rate.
4. How many times can I make PPF account deposits in a year?
There is currently no restriction on the number of times you can deposit money in your PPF account in a year. However, the total amount you can deposit in your PPF account is Rs. 1.5 Lakh in a financial year.
5. Can I transfer my PPF account to another person?
Transfer of PPF accounts from one person to another is not allowed. In case of the account holder's demise, the nominee will have to apply for account closure and withdrawal of the balance.
Sources:
https://economictimes.indiatimes.com/wealth/invest/how-ppf-account-works/how-it-is-taxed/slideshow/71791347.cms
https://economictimes.indiatimes.com/wealth/invest/why-investors-love-ppf-as-a-tax-saving-investment/suitable-in-a-low-interest-rate-regime/slideshow/89620331.cms
https://economictimes.indiatimes.com/wealth/invest/7-reasons-why-ppf-is-one-of-the-most-preferred-tax-saving-investments/articleshow/81638531.cms
ARN No: June22/Bg/10A
