Is PPF Interest Taxable? A Guide to Income Tax on PPF In India

Importance of PPF Account For Income Tax

PPF is a great option for people who are looking for investment options which have zero risks. The returns are not very high since it depends on the market but it offers stability. Its tax benefits can help you with investing long-term with many benefits. If you fall under the heavy tax bracket, then opening a PPF account is the optimum choice for you because it helps in reducing tax liability. Moreover, with its exempt-exempt-exempt status, you will not be charged taxes during investment, on interest rates and at the time of cash withdrawal. 

Recommended: A Complete Guide to Income Tax for NRIs in India

Tax Benefits of PPF Account

You can receive many benefits from opening a PPF account. Let us find out about the all tax benefits: 

1. Contributions 

Under Section 80C of the Income Tax Act, the contributions made within a PPF account are eligible for tax deduction. The maximum contribution which can be made is 1.5 lakhs per year.

 2. Maturity Amount

The maturity amount is fully exempt from taxes. This includes both the principal amount and interest amount.

3. Interest Earned 

The interest income is also completely tax-free. Whatever interest is added to the total income is exempt from taxes.

4. Increased Compounding

The amount invested within the account keeps compounding for 15 years. For example, if you deposit Rs. 60,000 for every year in these 15 years, you will receive around a total of 7 lakhs in interest and approx 16 lakhs upon withdrawal.

5. Reduces Tax Liability

The amount invested in the PPF account, upto the maximum limit can be deducted from the taxable income under Section 80C of the Income Tax Act, 1961. This helps in reducing tax liability.

Benefits Of Having A PPF Account

There are many benefits of having a PPF account. It includes:

1. Investment security

Since this is backed by the government, it is fully secure and also a stable form of investment with no risks. You can easily deposit money through net banking as well.

2. Guaranteed Returns

By investing long-term, you can gain a substantial amount for your retirement plans. It takes small savings from investors into long-term capital appreciation coupled with interest payments.

3. Earn Big By Investing Little

You can start investing with as little as Rs. 500 until you can start investing large amounts as much as 1.5lakhs

4. Partial Withdrawal

You can withdraw small amounts after 5 years of completion of your PPF account. This assures that you’re investing the amount properly for your future.

5. Transparency

The amount invested within the PPF account is calculated every financial year. Currently, the rate of interest is 7.1%. For example, if you were to deposit Rs. 50,000 for 20 years, then you would have around 22 lakhs by the time of maturity.

6. Facility of loan against PPF

If you’re looking for a short-term loan then you apply for a loan against your PPF account without any collateral or security. It will also be set at an agreeable interest rate. You can avail of such loans only from the third or sixth year.  

7. Pension Plans

PPF is treated as a good pension plan without any risks. Other pension plans are usually taxable however PPF accounts are tax-free with no taxes on the interest or maturity amount.

Read Also: Steps to File Tax for Residents in India This Year

Limitations of PPF account

There are limitations of PPF account which needs to be looked into, such as:

1. Lock-In Period

The 15-year lock-in period is very long in terms of years. It is one of the highest lock-in periods within most investment plans.

2. Limitation on investment

There is a big limitation on the amount you can invest every year. The maximum amount which can be invested within a single year is 1.5 lakhs.

3. Low Interest rate

The amount which is earned from interest is pretty low in comparison to most investment plans. You can earn more money from interest in regular fixed deposits.

4. No Joint Account

You cannot hold PPF accounts jointly, so if you want to open a joint account with your family members, then it will not be possible.

5. Contribution Requirement

You will be required to deposit a minimum amount annually to keep the account active. If the account is left inactive, then it can result in you being required to pay a penalty.  

Comparing PPF With Other Investment Options

When PPF is compared with other fixed-income investment options like Fixed Deposits or National Savings Certificates, you can receive a higher percentage of interest. However, the interest amount is taxable in these investments and it can affect the amount you will get in return.

Reporting PPF Interest in Income Tax Return

Taxpayers need to understand how to report their income in Income Tax Return. Let us learn how to do it:

Steps To Report PPF Interest in ITR:

1. Choose the right form 

Most of the time, you would be required to file your income tax return in ITR-1 (Sahaj) If your income comes from a business or profession, then you might need to use ITR-3 or ITR-4.

2. Fill out the form 

Fill in details related to information about you and your sources of income like salary, property, and so on.

3. Report PPF Interest in the “Exempt Income” Section

• Select the section labelled “Exempt Income” within ITR-1.
• Navigate to the field labelled “Other exempt income” or “Interest from PPF”
• Enter the total PPF interest earned during the financial year.

4. Complete the form

Fill in all remaining sections within the form, which includes bank details, tax payments and so on.

5. Submit the form

After filling in all details, make sure to double-check whether all information is correct or not. After double-checking, click on the submit button.

By reporting the PPF interest, you will be maintaining transparency and compliance with tax regulations. It does not leave an impact on your taxable income, however, it will prove that your financial records are accurate and complete. 

Read More: Input Service Distributor (ISD) Under GST: Functions & Benefits

Conclusion

By now, everything must be clear now. Investing in PPF allows individuals to opt for a safe investment plan which can be used for retirement, without needing to worry about tax charges.

Knowing how to file taxes is also important if you are part of a startup. So, if you are a company looking for steps of company registration in Gurgaon, then reach out to the best chartered accountant firms in Gurgaon today.