Should PPF account holders worry post-budget?

The BuyT Desk

Will contribution to Public Provident Fund(PPF) be taxed? This question may worry you because the government changed the taxation rules related to employee provident fund(EPF) contribution. As per the new regulations, an employee contributing more than Rs 2.5 lakh in his/her EPF will no longer enjoy tax-free interest income on the exceeded contribution. The interest earned up to 2.5 lakh contribution remains tax-free, but contribution beyond the threshold of 2.5 lakh will be taxed.

What about PPF?

This change will not impact your contribution to PPF account. Because PPF accounts already have a limit fixed on the deposit. As per the PPF act, an individual cannot contribute more than Rs 1.5 lakh annually in a PPF account. Any change in the contribution threshold or its tax liability will need amendment in the PPF act. Till the time this act has not changed the status of PPF remains to be exempt-exempt-exempt. The deposit, interest and withdrawal of PPF will be completely tax-free.

Where can you open a PPF account?

PPF has been one of the most popular tax saving cum investment strategies under section 80C of the income tax act. By investing in a PPF account, one can claim a deduction of up to Rs 1.5 lakh in a financial year. You can open a PPF account in a bank or a post office. PPF ensures a yearly interest from the government, which is compounded annually. At present, the interest for the FY- 2020-21 interest of PPF is 7.1%. This rate gets revised every quarter.

Tenure of PPF

The investment period for PPF is 15 years. After the completion of 15 years, it can be extended to further in a block of 5 years. Partial withdrawal from a PPF account is possible only after completion of 5 years. A PPF account holder can get a loan against their PPF from third to the sixth year from the account opening date.

Let’s understand with an example how your money gives you return in a PPF account. The minimum deposit that you can make in a PPF is Rs 500, and it can go up to Rs 1.5 lakh in a year. If you manage a yearly deposit of Rs 50,000 continuously for 15 years. I am considering the current interest of 7.1% as the rate of return. After 15 years the money deposited by you will be Rs 7,50,000 and the earned interest will be Rs 606,070. Which means the total corpus of Rs 1,356, 070 – you would have earned around 45% of return on your capital.

The plus point of PPF are-