What changed for PPF in the budget

Over the years, the government has introduced a number of schemes to promote long-term savings. To increase adoption among the common public, the government offers tax incentives on several savings schemes. One of the most popular government-backed tax-free schemes is the Public Provident Fund.

What is PPF?

The Public Provident Fund (PPF) is a long-term investment scheme, with a lock-in period of 15 years. The government announces and pays the interest on the PPF scheme every quarter. The PPF interest rate for the third quarter of 2020-21 has been set at 7.1%. One can start investing in the PPF scheme with a minimum amount of Rs 500 per annum, while the maximum investment allowed in the year has been capped at Rs 1.5 lakh.

Taxation status of PPF

The PPF scheme has a minimum lock-in period of 15 years, which can be extended by an additional 5 years. One of the major reasons for PPF scheme’s popularity has been the tax benefits offered to investors. PPF comes under the Exempt-Exempt-Exempt (EEE) category of tax policy, which means the principal amount, maturity amount, as well as interest amount, is tax-free under PPF. Finance Minister, Ms Nirmala Sitharaman made certain announcements in the Budget 2021 related to the taxation of the interest earned through provident funds. What exactly are the changes in tax on PPF interest in budget 2021? The Finance Minister left personal taxation largely untouched in the budget but tinkered with the taxation of the PPF interest amount.

What changed in the budget?

As per a proposal in the union budget, income tax will be levied on the interest earned by an individual on his/her contribution in excess of Rs 2.5 lakh in a financial year to a Provident Fund. Reading the 2021 budget summary gives the impression that the cumulative contribution to the Employee Provident Fund, the Voluntary Provident Fund and the Public Provident Fund will be considered for income tax. It essentially means that if the total contribution of an individual to all the three provident funds exceeds Rs 2.5 lakh in a financial year, he/she will have to pay income tax on the interest earned through the additional amount. However, reality is different.

As per tax experts, the contributions to all the three Provident Funds will not be clubbed together for the purpose of taxation. The limit for Employees’ Provident Fund (EPF)/Voluntary Provident Fund (VPF) and PPF will be different and the contribution to the three funds will not be aggregated together. The tax on PPF interest in budget 2021 becomes redundant as the maximum limit for PPF contribution is Rs 1.5 lakh in a financial year. Even though the limit of Rs 2.5 lakh in a year is applicable to PPF, it is irrelevant for all practical purposes as one is not allowed to invest more than Rs 1.5 lakh in a financial year.

The changes in the taxation rules will not have an impact on the PPF interest rate. However, individuals should be wary of investing more than Rs 2.5 lakh in EPF and VPF, if they want to save taxes. If an employee’s contribution to EPF and VPF together exceeds Rs 2.5 lakh in a year, the interest earned on the excess amount will be taxable in the hands of the individual. For instance, if an individual contributed Rs 1.5 lakh in a financial year to PPF and Rs 3 lakh to EPF, he/she will have to pay tax only for the interest earned on Rs 50,000 and not on Rs 2 lakh.

Conclusion

The tax exemption on withdrawal of accumulated balance from a Provident Fund is covered under different sections of the Income Tax Act, 1961. As per the income tax law, the contribution made by non-government employees to a Provident Fund is made to ‘Recognised Provident Fund’, and exemption on withdrawal of the accumulated amount is covered under Section 10(12) of the Income Tax Act. On the other hand, the tax exemption on withdrawal of the accumulated amount from the Public Provident Fund is covered under Section 10(11) of the Income Tax Act. Even after the budget proposals, the PPF remains one of the best long-term savings schemes. One can easily open a PPF Account through ICICI Bank and start saving. The entire process is fast, easy and completely online.

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