Know About Tax Benefits Of PPF
Published On Jan 31, 2022
Table of Contents
- Tax Benefits Of PPF
When it comes to tax-saving investment products, the Public Provident Fund (PPF) is an option that is popular among many. Here is a look at seven reasons why the PPF is a preferred fixed income, tax-saving investment option for long term goals like retirement.
Tax Benefits Of PPF
1. Triple Tax Exemption Status
PPF is one of the few investment products that enjoys the benefit of triple tax exemptions, i.e., the exempt-exempt-exempt (EEE) status. What this means is that you get tax exemption at the time of investment, accrual, and withdrawal.
It offers up to Rs 1.5 lakh deduction on investment made in each financial year under section 80C of the Income-tax Act, 1961. The interest that is earned each year is also exempted from tax. Thirdly, the accumulated corpus that you withdraw on maturity is also exempted from tax which makes it a tax-free income.
2. One Of The Highest Interest Rates Among Fixed Income Products
The Employees’ Provident Fund (EPF) currently offers the highest interest rate among fixed-income products that have government backing. For FY 2020-21, EPF is offering 8.5%. However, this investment option is limited to salaried individuals.
The PPF, on the other hand, is an investment product that even self-employed people can invest in. The current interest rate on PPF is 7.1% (for the quarter ending June 30, 2021), which is higher than 6.8% offered on other small savings schemes like the National Savings Certificate (NSC) and 6.7% offered on Post Office 5-year Time Deposit. PPF interest rate is often not far behind the EPF rate, however, there have only been a few occasions when the PPF interest rate was higher than the EPF rate.
3. Beneficial Floating Rates When Interest Rate Is Low
If you lock-in your investment at a lower interest rate for a longer period, you will lose out when rates go up. Now this is one of the many reasons why the PPF scores over products like the 5-year tax-saving bank FD. Unlike fixed deposits, where the interest rate is fixed for the entire investment period, the interest rate of PPF is floating which can change every quarter. Once the overall interest rate in the economy starts increasing the interest rate on PPF will also rise and your investment will start fetching higher returns.
A floating rate is a double edge sword however, and it may hurt when the rate falls. With a historically low rate of 4%, lowest since the year 2000, the chances of a significant rate reduction in the near future appears low.
4. Power Of Compounding Works Wonders In Long Term
If you have time on your side, the power of compounding can do wonders for your investment. A PPF account matures in 15 years. After the account matures, you can either withdraw the entire balance and close the account or extend it for five years with or without making further contributions. The extension in blocks of five years can be done indefinitely.
If you invest Rs 50,000 each year in PPF you can build a corpus of Rs 14.06 lakh in 15 years, if the interest rate remains at 7.1%. However, if you extend it for another 5 years this amount increases to Rs 22.69 lakh. With 3 such extensions and with a total investment period of 30 years you can accumulate Rs 52 lakh. If you go for the maximum permissible investment of Rs 1.5 lakh each year, you can build a corpus of Rs 42.18 lakh in 15 years, and with extensions you can save Rs 1.56 crore in a 30-year period.
5. Tax Haven For Conservative Investors
If you are a conservative investor looking for tax saving with assured return and safety of your investment, then PPF is one of the best options. When at present most of the large banks are giving 5.5% or lower interest rate on their 5-year tax saving FDs, the interest rate offered on PPF certainly comes with a good premium.
While safety on a bank FD is limited to Rs 5 lakh offered by the Deposit Insurance and Credit Guarantee Corporation, the return that you get on your FDs is not exempted from tax. Moreover, though Sukanya Samriddhi and Senior Citizen Savings Scheme offer higher interest rates compared to PPF, these are meant for specific purposes and available only for a limited set for investors.
6. Even Aggressive Investors Can Diversify Through PPF
Even an investor with a high risk appetite can keep some part of his/her investment in debt products to diversify their portfolio. If the investment is for a long-term goal, then PPF is an option for such aggressive investors as well as it gives the desired stability and optimum return in the debt portion of the portfolio.
The section 80C benefit may not be relevant for most investors in the highest income tax bracket as they have other avenues to utilize such as EPF, children’s education fee, home loan principal, term insurance premium etc. However, the tax exempted nature of return makes PPF a far more appealing option especially when any income is taxed at a rate of 30% or more. With PFF, investors can build a corpus which is completely tax free.
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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.