What makes PPF the choice of investment for everybody is that -

- The amount invested in PPF, with in the financial year, can be
**claimed as deduction**under 80C. - The interest earned is tax free.
- Backed by GOI making it one of the safest saving instrument available.

So let's see what are the tax exemption benefits of PPF making it such an attractive investment.

__Tax exemption benefits of PPF__

Annual contributions made to the
__PPF account__ are **exempted from tax under Section 80C** of income tax.
Currently Rs. 1,50,000 (FY 2015-16) is the amount that can be claimed under 80C, but that doesn't mean all of that
Rs. 1,50,000 has to be invested in PPF compulsorily. Rs. 1,50,000 is the total amount that can be claimed for deduction
under 80C.

**As Exp. - ** Let's assume a person is contributing Rs. 40,000 to his EPF(Employee Provident Fund) account
and also has an insurance policy for which annual premium is Rs. 20,000. Since EPF contribution and insurance
premium can also be claimed as deduction under 80C, that leaves another Rs. 90,000 to be invested in case he wants
to claim full exemption. That amount (Rs. 90,000) can be invested in PPF. On the other hand if a person has
more money to invest then he can put Rs. 1,50,000 in PPF but based on the above scenario the
exemption can be claimed only on Rs. 90,000.

__Tax benefits for minor's PPF account__In case a person has two accounts one for himself and one for his minor kid then the amount that is invested in both of the accounts with in the financial year can be claimed for exemption but the upper limit of exemption remains Rs. 1,50,000. Same thing is applicable if person has 3 accounts one for himself and two for minor kids.

__PPF provides EEE (Exempt-Exempt-Exempt) benefits__

Before going into why PPF is termed as
__EEE__, first lets have a little introduction on **what exactly is EEE.**

There are 3 ways Govt. taxes the monies invested by public at various stages of investment.

When the money is invested **it goes through three stages**, which are -

- Contribution to an investment scheme.
- Accumulation of interest.
- Withdrawal stage, when the lump sum amount (sum of money invested and accrued interest) is withdrawn.

**How does EEE relate to these stages?**

EEE stands for **Exempt, Exempt, Exempt** which means -

- First exempt means that the amount invested will be eligible for deduction under some section (As exp 80C) subject to the total exemption limit. The invested amount will be deducted from the total taxable income of the individual.
- Second Exempt means the accrued interest will not be added to the total income and will not be taxed. Thus in case of second exempt interest earned is not taxed.
- Third exempt means the income from the investment, at the time it is withdrawn, would be tax free.

With this information about EEE we can easily see why PPF is termed as EEE?

PPF is termed as EEE (i.e. Exempt, Exempt, Exempt) because

- Contribution to the PPF account is
**exempted**under 80C. - Interest earned is
**tax exempted**, there is no TDS as in the case of FD(at the rate of 10%) if interest earned in the fiscal year is more than Rs. 10,000. - Withdrawal from the PPF account is also
**tax exempted**.

__Effective rate of return on PPF may be higher__

Though the rate of interest we get on PPF is 8.7% but as we already know PPF comes under Exempt, Exempt and Exempt
investment category so the **effective rate of return on PPF can be much higher depending on the tax slab a person
comes under**.

Current tax slabs are 10%, 20% and 30%. Along with the education cess, which is 3% of the total of Income Tax and Surcharge,
the tax rates come to 10.3%, 20.6% and 30.9%. Noting the point that the person doesn't need to pay any tax on the
interest earned on PPF the effective **rate of return can go as high as 12.59% **if the person happens to
fall under 30.9% tax slab.

To show it with the **help of an example** let us assume that person A comes under 30.9% tax slab
as his taxable income is more than Rs. 10,00,000. If he has invested Rs. 1,00,000 in PPF then he
earns Rs.8700 at the rate of 8.7%. Now if that return is not exempted but taxed then he has
to pay 30.9% tax on this interest income of 8700. In that scenario, when he has to pay tax at 30.9%
on interest income, he will have to earn an interest income of 12590 to have a post-tax return of Rs.8700.

**12590 * 30.9/100 = 3890.31**

**12590 - 3890.31 = 8699.69**

So with this logic the effective rate of return, for a person who comes under the **30.9% slab, comes to 12.59%**.

Effective rate of return, for a person who comes under the **20.6% slab, comes to 10.96%**.

Effective rate of return, for a person who comes under the **10.2% slab, comes to 9.69%**.

Same thing can also be understood in a different way, if one hadn't shown the investment of Rs. 1 Lakh then one
would have paid taxes at 30.9% (assuming the person falls in 30.9% tax bracket) on that Rs. 1 Lakh. So in a way one
is investing **only Rs. 69,100 to get an interest of Rs. 8,700**.

**Let's do the math again -**

Amount of tax payable if that 1 Lakh was not invested

**1,00,000 * 30.9/100 = 30,900**

Thus actual investment is

**1,00,000 - 30900 = 69,100**

To get return of Rs. 8,700 on the invested amount of Rs. 69,100 the rate of return should be 12.59%.

**69,100 x 12.59/100 = 8699.69**

By this calculation again the effective rate of return for a person who comes under the 20.6 % slab is 10.96% and for a person who comes under the 10.2% slab it is 9.69%.

Thus PPF, apart from being a safe investment avenue and having almost zero volatility can provide up-to 12.59% effective rate of return for tax payers. PPF being EEE category investment brings a huge benefit of not to pay any taxes on the invested amount at any of the three stages.

**Points to note -**

- Annual contributions to the PPF account are exempted from tax upto the maximum limit of Rs. 1,50,000.
- Minimum amount that has to be deposited in the PPF account in the financial year is Rs.500.
- Maximum limit is Rs. 1,50,000 which is the current exemption limit, so if there is any increase in exemption limit then the maximum investment limit in the PPF account may increase too.
- PPF is EEE investment which means PPF is exempted from tax across all three stages.
- Effective rate of return on PPF may be much higher because of it being EEE investment.
- Investment schemes may be categorized under EEE, ETE and EET.

That's all for this topic **Public Provident Fund (PPF) tax exemption benefits**. If you have any doubt or any
suggestions to make please drop a comment. Thanks!

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Sir , please inform me whether interest earned in PPF during extended 5 yr period ( without subscritpion) is exempt or not

ReplyDeleteSir , please inform me whether interest earned in PPF during extended 5 yr period ( without subscritpion) is exempt or not

ReplyDeleteSir pls guide me

ReplyDeleteIf i am paying cash in ppf and not showing in my account so on maturity my ppf is taxable?

PPF withdrawal at maturity is not taxed right now. So no problem.

DeleteFor how you are getting cash which is not coming out of your account is another story!!