Investing in PPF to save Income tax : If your investment reduce the tax amount and get a tax free income from that investment then it would be like Sone pe Suhaga.

Investing in PPF to save Income tax

Today, I am going to discuss one of my favourite small saving scheme i.e. Public Provident Fund (PPF).
The Public Provident Fund is a saving scheme which was introduced by the National Saving Institute of Ministry of Finance in 1968 by introducing THE PUBLIC PROVIDENT FUND ACT, 1968.
In the president era it is most favourable saving scheme of Resident Individuals of India. I have used Resident Individuals of India because only an individual who is resident of India could open his/her PPF account.
A day one of my NRI friend ask me that Mohit could I invest in Public Provident Fund. My reply was No as its the basic condition that only a resident individual can open the PPF account however if a resident individual becomes NRI after opening his PPF account then he could continue to operate that and deposit the sum. Even a Hindu Undivided Family (HUF) who has a separate recognition in Indian Income Tax Law could not open a PPF account.
Getting of PPF account is not much complicated now. You just need to visit your bank branch and ask them whether they have the facility of PPF account and if they have, its so simple to open the ppf account.
It would be pertinent to mention here that an individual could not hold and operate more than one PPF account.
Original duration is 15 years. Thereafter, on application by the subscriber, it can be extended for 1 or more blocks of 5 years each.
The Investment amount could be between Rs. 500/- to Rs. 1,50,000/- in a financial year (i.e 1^st April to 31^st March). The subscriber should not deposit more than Rs.1.50 lac per annum as the excess amount will not earn any interest.
If your contribution to the PPF account is credited on or before 5th of that month, then that contribution will bear interest for that month too.
Public Provident Fund enjoys EEE tax exemptions. An EEE (Exempt, Exempt & Exempt) tax exemption means that the annual investment in your PPF account, the interest earned on your PPF account and the lump sum proceeds out of your PPF account are all exempted from Income Tax. This EEE tax exemption coupled with good rate of interest (compounded annually) makes PPF an unavoidable choice among small saving investment schemes.
Seeking the benefits of this scheme, today even young generation (21-25 year old) are going for this investment as the minimum investments amount is just Rs. 500/- which they could increase with the span of time as their income increase. So at a stage when an individual needs more money (at the age of 35-40 year old) they could have sufficient funds to meet their requirements.
The main drawback of this scheme is a Long Lock in Period of 15 years. However, this could also be mitigate as you can opt for partial withdrawal. Such withdrawals are permitted after the expiry of 5 years from the end of year when subscription was made.For example, an account opened in September 2015 (FY 2015-16) will be eligible for partial withdrawals from 1st April 2021 (FY 2021-22). Only one withdrawal can be made per year. You can withdraw up to 50% of account balance at the end of 4th year immediately preceding the year when withdrawal request is made, or balance on last year, whichever is lower. Like if you make a request of withdrawal of money from PPF account as on 15^th April 2021 then you can withdraw the 50% amount of the balance outstanding on 31^st March 2018 or 31^st March 2021 whichever is less.
As in the above para we have discuss that we could mitigate the drawback of long lock in period of 15 years by withdrawing partial money after the 5 years to some extent. Now, someone could ask what about the first 5 years So what if you cant make partial withdrawal, in this case you can avail loan facility from the beginning of 3rd FY till the end of 6th FY.So, if you opened your account on Aug 14, 2013 (FY 2014), you can take loan from the beginning of 3rd financial year (FY 2016) i.e. April 1, 2015 till the end of 6th financial year (FY 2019) i.e. March 31, 2019.After having the Loan amount you need to pay the same maximum in 3 years (i.e. 36 Months). The loan amount will be limited to 25% of the balance outstanding to the subscriber’s credit at the end of the second year immediately preceding the financial year in which the loan is requested. The rate of interest would be less than the personal loans i.e. it would be just 2% extra than the rate of interest on PPF deposit.
So, after getting two such a ways let us discuss the recently introduced premature closure of PPF rules in 2016. Now the PPF account holders will be able to make a premature closure of their PPF account provided it is 5 years old for some specific reasons like treatment of serious disease or higher education provided you need to submit the supporting documents and the bills as per the reason claimed. But in this case you need to be ready for a penalty of 1% interest.
So, as the provisions are becoming more flexible, it is attracting more and more individuals towards this scheme.
Earlier the Govt. decide the interest rate on these type of scheme (KVP, NSC, PPF etc.) on yearly basis. But the government will from now on set them every quarter. As there was the decrease in interest rates of all such schemes, Interest rate on Public Provident Fund (PPF) scheme has been reduced to 8.1 per cent for the period April 1 to June 30 from 8.7 per cent. TheGovernmentthis time not changed the interest rates for the second quarter of 2016-17 (July-Sept 2017) and kept it at 8.10%.
Keeping in view of all these benefits it is most advisable and favourite saving scheme. But as the situation of every person differs from the other so please consider all the aspects before taking such important decision.

This Article has been written byCA. Mohit Jindal and he can be reached at[email protected]