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Income Tax on PPF Account

PPF Account

Income Tax on PPF Account

Public Provident Fund (PPF) Account is a long-term debt scheme, established by the Indian Government for which regular interest is paid. Any Indian can invest in this scheme and can earn a sufficient tax-free return on the same that is usually higher than the return which is offered by banks on fixed deposits. A PF account is only for salaried employees, whereas investing in a PPF account can be made by both salaried and self-employed individuals.

Public Provident Fund Account

PPF can be opened at any post office or at some authorised bank branches. Many individuals prefer maintaining a PPF Account in a bank instead of at post offices. This is because banks allow online deposits in Public Provident Fund, unlike post offices. Non-Resident Indians (NRI) are not permitted for Public Provident Fund. However, if an Indian opens a Public Provident Fund and later becomes an NRI, the individual can still make investments in his account.

A PPF account can be opened on behalf of a minor by his/ her parents, but only one parent can open this account on behalf of the minor. Grandparents cannot open public provident fund on behalf of a minor. In the event of the death of both the parents, the grandparents can act as a guardian of the minor in opening the account.

Deposit Amount in a PPF Account

According to the Public Provident Fund Scheme, while opening an account for the individual himself or for a person to whom he is a guardian, has to apply in Form A with an initial subscription amount of Rs. 100. After receiving the receipt of the application form, the Accounts Officer opens the account and issues a passbook in which all the entries pertaining to the deposits, loans and withdrawals will be entered. For Online Banking, a statement of the account has to be issued in place of the passbook of the account holder. Even though a PFF Account can be opened with Rs. 100, according to the Public Provident Fund Act 1968, The minimum amount that has to be invested each year is Rs. 500 and the maximum amount an individual can be deposited each year is Rs. 1.5 Lakhs.

All subscriptions have to be made in cash/crossed cheque/demand draft/pay order/online transfer of the concerned Accounts Officer to the place where the office is located.

If a Public Provident Fund account holder fails to deposit Rs. 500 every year, a penalty of Rs. 50 would be charged with the arrears of subscription of Rs. 500 every year.

This amount can be paid in 12 monthly instalments or as a single payment, whichever is preferred by the account holder. Previously, HUFs were also allowed to invest but HUFs are not permitted to invest in PPF account before 13th of May 2005, they are permitted to continue and would be closed on the expiry of 15 years from the date of opening the account.

PPF Interest Rule

The standard PPF Interest Rates are made against the 10 year Government Bong Yield and is 0.25% higher than the average Government Bond Yield. PPF Interest Rates are revised annually, but from 2016, these rules are revised quarterly. These rates are calculated for a month on the basis of the lowest balance in an account, starting from around 5th day and to the end of the month and the interest on PPF account is then credited to the account of the account holder towards the end of the year.

Here is the PPF Interest Rates for the current and past quarters.

Period PPF Interest Rate
July – September 2018 7.6%
April – June 2018 7.6%
January -March 2018 7.6%
October – December 2017 7.8%
July – December 2017 7.8%
April – June 2017 7.9%
January – March 2017 8%

Earning Maximum PPF Interest

If an individual does not deposit any additional amount before the 5th of the month, there will no interest earned for that additional amount. Therefore, the lowest monthly balance would be on the 5th regardless of the amount that is deposited after the 5th of the month. Individuals making additional deposits that are made before the 5th of every month will be earning maximum interest for the additional amount. The appropriate way to earn maximum interest on PPF account is by depositing Rs. 1.5 Lakh before the 5th of April so that interest for the whole sum can be earned for the entire financial year. A one time deposit that is made at the beginning of the year, helps an individual to earn maximum interest.

Tenure of PPF

PPF in India can be closed any time after the expiry of 15 years from the date of opening the account. The amount deposited in the account can be withdrawn at the time of closure. For closure of PPF account, the account holder has to apply in Form C and is required to furnish the Pass Book of the account.

Extension of PPF Account

On the completion of 15 years, the account holder can apply for an extension for a further time period of 5 years. If an account holder opts for an extension, he shall be eligible for Partial Withdrawal by applying in ‘Form H’, with the condition that the total number of withdrawals during the 5 years should not be more 60% of the balance of his account during the extension.

Pre-Mature Withdrawal from PPF

A lock-in period of  5 years is established, where the account holder can withdraw money only towards the end of the 5th year. The maximum amount an individual can withdraw is 50% of the total amount that is available in the account. The period of withdrawal is the lower of the following.

  • At the end of the 4th year or
  • At the end of the previous year when the withdrawal is made.

If the account holder has already taken a loan against this amount, it is also deducted from the above calculated time period.

From the 1st of April 2016, premature closure of PPF account has also permitted certain genuine cases like a serious ailment of the account holder, spouse, childer or parents or if the amount is required to pursue higher education. This option is available only to those accounts that have completed 5 years from the date of opening. In addition to this, a penalty of 1% reduction in interest is also levied on the while deposit.

Loans on PFF Account

Loans are provided from the 3rd financial year excluding the year of deposit. The amount of such loans should not be more than 25 per cent of the amount that is available in the account holder’s credit towards the end of the second year that is immediately preceding the year in which the loan is applied for. A fresh loan cannot be taken when a previous loan or interest is outstanding. The interest rate is 1% if the amount is repaid within 36 months and at 6% on the outstanding loan after 36 months. The repayment can be made either a single payment or in instalments.

Benefits of Investing in PPF

The amount that is reflected in the Public Provident Fund consists of 2 parts namely

  • The amount that is deposited which is the Principal Amount
  • The interest earned for the amount that is deposited.

The tax benefits for the investments made in this account can be availed for both Principal components and for the Interest component.

Tax Benefits on the Principal Component

As per Section 80C, the amount deposited in this account can be claimed as a deduction from the Gross Total Income while filing the Income Tax Return. The amount that can be claimed as a deduction under Section 80C is restricted to a maximum Rs. 105 Lakh per annum. The total taxable income calculated after the deduction under Section 80C is likely to be taxed as per the Income Tax Slabs for that year.

Tax Advantages on the Interest on PPF Account

The interest on a PPF account is also excluded from the levy of Income tax. In other words, there is no income tax levied on the interest on a PPF account and this income is tax-free.

Public Provident Fund Account Scheme