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What Are The Tax Benefits Of Ppf
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The Public Provident Fund or PPF is one of the most popular small savings schemes started by the Government. It is called a small savings scheme because this account can be opened with a small amount i.e Rs. 500. The minimum contribution every year after opening the account is also Rs. 500. The Government decides the rate of interest for this account every quarter. The interest is calculated per month but is credited at the end of the year. The maximum investment that can be made in the PPF account is Rs. 1,50,000 per year. This investment can be in lumpsum or in installments. The maximum installments allowed in a year are 12. A PPF account has a lock in period of 15 years and once after maturity, it can be renewed in blocks of 5 years at a time.
One of the main reasons for the popularity of PPF are the tax benefits available on it. PPF is an EEE investment, which means it enjoys complete tax benefits at each stage of investment. Let us examine the EEE status and how it works.
There are three stages of an investment:
• Investment stage
• Earning stage/Accumulation stage
• Withdrawal stage
In the first stage, funds are invested in the particular option. In the second stage, the investment earns in the form of dividends, interest or capital appreciation. In the third stage, the investment matures or a withdrawal is made from the investment.
Depending on the tax treatment of each stage, investments can be classified as EEE, ETE, TTE, ETT. E means exempt and T means taxed.
The PPF enjoys EEE status. This means there is a tax benefit on investment, there is a tax benefit on the accrual or the earning stage and there is a tax benefit on withdrawal.
1. Tax benefit on investment:
Under Section 80C of the Income Tax Act, any investment made in the PPF account gets a deduction up to Rs. 1,50,000. This deduction can be claimed in the income tax return each year an investment is made in this account.
2. Tax benefit on accrual:
One of the best advantages of investing in PPF is that the interest earned on PPF is exempt. Exempt income is not considered as income for the purpose of taxation. It is not added to the taxable income of the taxpayer and consequently has no impact on the tax slabs. However, it is important to disclose the tax free income in the income tax return. Any interest earned on a PPF account is exempt which makes it tax neutral. This gives the depositor additional income which is reinvested and earns interest in the future years. This improves the gains from this account.
3. Tax benefit on withdrawal:
Any amount received on withdrawal from PPF or on maturity of the PPF account is exempt from tax. This amount is not added to the taxable income of the taxpayer and consequently, it provides a huge corpus to the investor to use for huge expenses such as retirement, higher education expenses etc.
Neha Sharma is a finance student who loves to write in her free time. She has spent considerable time researching about PPF. Through her work, she has mentioned the tax benefits one can enjoy with a PPF account
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