Public Provident Fund (PPF) and its Benefits

Public Provident Fund or PPF is one of the most popular investment options in India on the fixed income side.  Investment in PPF scheme benefits an individual by way of tax saving, interest earn is also free from taxes under the provision of Income Tax Act. Though most of the person makes investment in PPF to fulfill the criteria of 80C limit of Rs. 1 lacs but one has to understand its significance beyond that.

Let us look at the some of the basic facts relating to the scheme and also what makes it an extremely attractive investment option.

Eligibility and Investment limit

Any individual (whether salaried or self employed) can open PPF account in his own name or on behalf of minor. A person cannot open more than one account in his or her name, joint account is also not allowed.

One is free to nominate one or more individual. On the death of the account holder, nominees cannot keep the account going by making contributions. If there are no nominees, the legal heirs get the money. You can open one account for yourself and others for your child/ children. But, on your death, your children cannot make any additional contributions.

The minimum amount of investment in a PPF account is Rs 500 per annum and the maximum amount of investment in a year is Rs 1,00,000 (w.e.f. 01st Dec, 2011). In case of a minor's account, the investment in the minor's and guardian's account together cannot exceed Rs 1, 00,000 per annum.

NRI are not allowed to subscribe to PPF Account. However, if someone opens a PPF Account while he is a Resident of India but subsequently becomes a NRI, he shall be allowed to continue investing in his account. However, If you are an NRI at the time the deposit matures, you would need to withdraw the balance. An NRI is not eligible for extension on the PPF account.

Deposit to PPF account can be made in a maximum of 12 installments in a year.

Where can account be opened?

PPF account can be opened in any post office and some authorized branches of banks. Though opening PPF in authorized branches of bank is more preferred as bank permits online deposit into PPF accounts whereas post offices don’t provide this facility.

Time Duration of PPF

The PPF account is valid for 15 years. The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account.  It can be extended for a period of five years after that. During these five years, you earn the rate of interest and can also make fresh deposits.

Loan on PPF Account

Loans can be availed from the 3rd financial year excluding the year of deposit. Amount of such loans must not exceed 25 percent of the amount that stood to the account holder’s credit at the end of the second year immediately preceding the year in which the loan is applied for.

A fresh loan is not allowed when a previous loan or interest is outstanding. Interest is charged at a rate of 1% if repaid within 36 months and at 6% on the outstanding loan after 36 months. The repayment may be made either in lump-sum or in Installments.

Premature withdrawal from PPF

The entire amount in your account could be withdrawn only on maturity. However, in times of financial crises partial withdrawals are permitted subject to certain ceiling limits. You could withdraw once a year, from the 7th year onwards. Such withdrawals, must not exceed, 50% of the balance at the end of the fourth year, or 50% of the balance at the end of the immediate preceding year, whichever is lower.

Rate of Interest

Rate of interest of the PPF account is not fixed and gets change every fiscal year. For the FY 2012-13 rate of interest is 8.8% p.a. The interest on the opening balance and the deposits made during the year gets credited to the account every year on March 31. The interest is compounded annually.

Tax Exemption

a. The annual investment into PPF account qualifies for a deduction under Section 80C

b. The interest earned on the PPF account every year is not taxable

c. The lump sum withdrawal at the time of maturity is not taxable

This makes PPF an extremely tax efficient investment option.

Highlights:

1. If someone does not make any deposit in a year in PPF, the account gets discontinued. However, the account can be revived by payment of Rs 50 for every year of discontinuation along with the arrears of subscription of Rs 500 per year.

2. Ideally, deposits into PPF account should be made between 1st and 5th of the month to get interest for that month. This is because interest gets calculated on the minimum balance between the 5th day and end of the month.

3. It is possible to take a loan as well as make withdrawals from your PPF account, subject to certain conditions.

4. A PPF account is free from attachment by a court in respect of any debt or liability incurred by the PPF member. It is also exempt from Wealth Tax.

5. Though interest rate in fixed deposit is higher than interest in PPF, but interest amount in PPF is tax free whereas interest in Fixed Deposit is taxable. Thus if one calculate interest on FD after deduction of tax, the effective interest rate is more in PPF account as compared to FD.

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Understanding Tax Benefit Under Section 80D, 80DD, 80DDB

We shall be now discussing on importance and income tax deductions under sections 80D, 80DD and 80DDB for the purpose of tax saving which relate to medical insurance premium, medical expenses on treatment of handicapped dependent and medical expenses on treatment of specified diseases.

In today’s world every family has regular medical expenses. This may be towards a health insurance premium, or expenditure related to a family member’s disability/critical illness. The Income Tax Act of 1961 has made provisions to reduce this burden through tax deductions under section 80D, 80DD, 80DDB.

Section 80D in Respect to Health Insurance Premiums

Expenses incurred towards payment of health insurance premiums, qualify for a tax deduction under section 80D.

Deduction Limit: Amount of health insurance premium paid or Rs. 15000 whichever is less.  For senior citizens, amount of health insurance premium paid or Rs. 20,000, whichever is less.

A further deduction of Rs 15,000 could be claimed, for buying health insurance policy for your parents (Rs 20,000 if either of your parents is a senior citizen). This is irrespective of whether they’re dependent on you or not. No deductions can be claimed for in-laws.

Senior Citizen:  Finance Act, 2012 has proposed to amend age of senior citizen from 65 year to 60 year, effect shall take effect from 01.04.12.

Applicable to: Individual assesses can claim deduction for premiums paid towards health insurance of self, spouse, parents and children.

For HUF assesses, premium paid for insuring the health of any member of the HUF, can be used for deduction.

Highlights:

a.       The premium may be paid by any mode of payment, other than cash.

b.      The health insurance premium that you pay must be from the taxable income applicable for the year you claim. Premiums should not be from gifts received by you.

c.       Part payment of premium is allowed. For example, suppose your parents contribute 50% of their health insurance premium and you pay the balance 50% of their premium. In such a case, you could avail the deduction for the amount contributed by you and your parents too could avail deduction for their contribution.

Finance bill 2012 has also proposed deduction for expenditure on preventive health check-up.

 1.   It is proposed to amend this section to also include any payment made by an assessee on account of preventive health check-up of self, spouse, dependent children or parents(s) during the previous year as eligible for deduction within the overall limits prescribed in the section. However, the proposed deduction on account of expenditure on preventive health check-up (for self, spouse, dependent children and parents) shall not exceed in the aggregate Rs.5,000).

2. It is further proposed to provide that for the purpose of the deduction under section 80D, payment can be made – (i) by any mode, including cash, in respect of any sum paid on account of preventive health check-up and (ii) by any mode other than cash, in all other cases.

3. These amendments will take effect from 1st April, 2013.

Section 80DD for Medical Treatment of Handicapped Dependents

If you are incurring expenditure for the treatment of your handicapped dependent, you could claim a deduction under section 80DD.

Deduction Limit: Rs 50000, or actual expenditure incurred, whichever is lesser. For severe handicap conditions Rs. 1,00,000 is the deduction limit.

Applicable to: Deduction can be claimed for dependent parents, spouse, children and siblings. Dependents must not have claimed any deduction for their disability.

Deductions are permissible in either of the following cases.

a) Costs incurred for medical treatment, training or rehabilitation of a disabled dependent, including amount spent for nursing.

b) Amount paid towards an insurance scheme for the maintenance of your disabled dependent in case of your untimely death.  

Meaning of Disability- Disability means a person suffering from 40% or more of any of the below disabilities. A severe disability condition is 80% or more of the disabilities.

a) Blindness and Vision problems b) Leprosy-cured c) Hearing impairment) Locomotors disability e) Mental retardation or illness.

Highlights:

a) Individuals would need to produce a copy of the disability certificate as issued by the central or state government medical board to claim deduction.

b) Insurance policy obtained must be in your name and should be a policy for life. It could pay either an annuity or a lump sum amount for the benefit of the dependent on your death.

c) If the disabled dependent predeceases you, the policy amount is returned to you, and treated as income for the year in which you receive it, thus fully taxable in your hands.

Section 80 DDB for Treatment of Specified diseases

Medical expenses paid for treatment for self or dependent relatives suffering from specified illnesses as mentioned in rule 11DD, tax benefit can be claimed under section 80DDB.

Deduction Limit: For individual assesses  a deduction limit of Rs. 40,000 is applicable. For a senior citizen, the limit is Rs. 60,000.

Applicable to: Deduction is applicable for treatment of self, spouse, children, siblings, and parents, wholly dependent on you.

Diseases covered

a) Neurological Diseases (where the disability level has been certified as 40% or more).

b) Parkinson’s Disease

c) Malignant Cancers

d) Acquired Immune Deficiency Syndrome (AIDS)

e) Chronic Renal failure

f) Hemophilia

g) Thalassaemia

Highlights:

No deduction can be claimed on account of reimbursement for the treatment from insurance company or employer. However, in case of partial reimbursement, the balance amount can be used for a deduction.

A certificate would be required from a specialist working in a government hospital, as proof for the specified ailment.

Senior Citizen:  Finance Act, 2012 has proposed to amend age of senior citizen from 65 year to 60 year, effect shall take effect from 01.04.12.

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Deduction Under Section 80 C of Income Tax Act

As per Income Tax rule, income from different source should be aggregated first to find out Gross Total Income (GTI) & then deduction is allowed under Chapter VIA (80C to 80U) from GTI & then tax is to be calculated.

Deduction u/s 80C is available to individual or Hindu Undivided family (whether resident or non- resident) on the basis of specified investments or contributions or deposits or payments made during the previous year subject to maximum of Rs 1,00,000. Thus if an individual is in highest tax bracket of 30% , full investment u/s 80C  can save him Rs. 30,000 in a year.

One of the significant reasons is to know what all instruments of investments and deductions / exemptions have been included in the Section 80C of Indian Income Tax for employees, so that they can plan their tax savings according to the same, and maximize the benefits. However, it is important to know the Section in toto so that one can make best use of the options available for exemption under income tax Act.   One important point to note here is that one can not only save tax by undertaking the specified investments, but some expenditure which you normally incur can also give you the tax exemptions.

As income tax is major component of the salary, the changes / additions in 80C Section has major impact on the savings and expenses of salaried employees as they have a fixed source of income. The 80C Section deductions are introduced to boost savings of employees on one side and save tax on the other side.

We will now see in detail those deductions that are permissible (Qualifying Investments) under section 80C in this section. The following is section 80c deductions / exemption list.

Provident Fund (PF) & Voluntary Provident Fund (VPF): As per act PF is deducted from every one salary. Both employee and your employer contribute to it equally. While employer’s contribution is exempt from tax, employee contribution is only eligible for deduction u/s 80C.

Public Provident Fund (PPF): Among all the assured returns small saving schemes, Public Provident Fund (PPF) is one of the best. Current rate of interest for FY 2012-13 stands @ 8.8% P.a which is tax-free and the normal maturity period is 15 years. Minimum amount of contribution is Rs 500 and maximum is Rs 100000 (w.e.f. 01.12.2011). Read More

Life Insurance Premiums: Any amount paid towards life insurance premium for yourself, your spouse or your children can also be included in Section 80C deduction. Please note that life insurance premium paid for parents (father / mother / both) or in-laws is not eligible for deduction under section 80C. If premium is paid for more than one insurance policy, all the premiums can be included. It is not necessary to have the insurance policy from Life Insurance Corporation (LIC) – even insurance bought from private players can be considered here.

Equity Linked Savings Scheme (ELSS): Some mutual fund (MF) schemes specially created to offer tax savings, and these are called Equity Linked Savings Scheme (ELSS). The investments that you make in ELSS are eligible for deduction under Sec 80C. Investment under ELSS can also be made by way of SIP.

Home Loan Principal Repayment: The Equated Monthly Installment (EMI) that one pay towards repayment of home loan consists of two components – Principal and Interest. The principal component of the EMI qualifies for deduction under Sec 80C. Even the interest component can save significant income tax – but that would be under Section 24 of the Income Tax Act. Details shall be discussed in latter post for our readers

Stamp Duty and Registration Charges for a home: The amount of stamp duty and registration charges paid for registration of the documents of the house can be claimed as deduction under section 80C in the year of purchase of the house.

National Savings Certificate (NSC): National Savings Certificate (NSC) is a 6-Yr small savings instrument eligible for section 80C tax benefit. Rate of interest is eight per cent compounded half-yearly, i.e., the effective annual rate of interest is 8.16%.The interest accrued every year is liable to tax (i.e., to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.

Infrastructure Bonds: These are also popularly called Infra Bonds. These are issued by infrastructure companies, and not the government. The amount of investment in these bonds can also be included in Sec 80C deductions.

Pension Funds – Section 80CCC: This section – Sec 80CCC – stipulates that an investment in pension funds is eligible for deduction. Section 80CCC investment limit is clubbed with the limit of Section 80C – it means that the total deduction available for 80CCC and 80C is Rs. 1 Lac. This also means that the investment in pension funds up to Rs. 1 Lac can be claimed as deduction u/s 80CCC. However, as mentioned earlier, the total deduction u/s 80C and 80CCC is available up to Rs. 1,00,000 both inclusive.

5-Yr bank fixed deposits (FDs): Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section 80C deduction. This FDs are not available in PSU banks but now some of the private banks are also offering  5 years FD which are eligible for deduction u/s 80C.

Senior Citizen Savings Scheme 2004 (SCSS): A recent addition to section 80C list, Senior Citizen Savings Scheme (SCSS) is the most lucrative scheme among all the small savings schemes but is meant only for senior citizens. Current rate of interest is 9% per annum payable quarterly. Please note that the interest is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on these deposits won’t earn any further interest. Interest income is chargeable to tax.

5-Yr post office time deposit (POTD) scheme: POTDs are similar to bank fixed deposits. Although available for varying time duration like one year, two year, three year and five year, only 5-Yr post-office time deposit (POTD) – which currently offers 7.5 per cent rate of interest –qualifies for tax saving under section 80C. As the rate of interest is compounded quarterly but paid annually. The Interest is entirely taxable.

NABARD rural bonds: There are two types of Bonds issued by NABARD (National Bank for Agriculture and Rural Development): NABARD Rural Bonds and Bhavishya Nirman Bonds (BNB). Out of these two, only NABARD Rural Bonds qualify under section 80C.

Unit linked Insurance Plan: ULIP stands for Unit linked Saving Schemes. ULIPs cover Life insurance with benefits of equity investments. They have attracted the attention of investors and tax-savers not only because they help us save tax but they also perform well to give decent returns in the long-term.

Others: Apart from the major tools which are listed above, there are some other things, like children’s education expense (for which you need receipts), that can be claimed as deductions under Sec 80C.

Note: If anyone’s income falls under taxable limit, he/she should defiantly invest in any of the tools as mentioned above up to Rs 1 Lac to save tax, tools in which one should invest will entirely depends upon his/her needs, investor could evaluate the same and make plan investment after detailed market study. It is advisable to start making investment from the beginning of year instead of going for unplanned investment at the end of the year just to save taxes.

Income tax slab for FY 2012-13 and FY 2011-12

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INCOME TAX SLAB FOR FY 2012-13 OR AY 2013-14

Finance Bill 2012 was introduced in Lok Sabha and presented by our finance minister Sri Pranab Mukherjee on 16^th March 2012. The new tax slab rate was proposed but changes are not of much significant.

In this issue we shall be simply try to focus on the new tax slab as proposed by the finance bill 2012 for the AY 2013-14. Basic exemption limit are revised and tax slab for men and senior citizen          has been broadened. The threshold income tax exemption        limit in AY 2013-14  for men has been revised to Rs 2.00 lacs from previous year i.e. AY 2012-13 limit of Rs. 1.80 lacs. This means that there will be no tax if total income of individual is up to Rs. 2.00 lacs.

Note: Concept of Total Income will be covered in latter post.        

In AY 2012-13, 20% slab was for income in between Rs.5 lacs to Rs. 8 lacs, but now it has been widened up to Rs.10.00 lacs instead of Rs. 8.00 lacs.

From above it can be clearly inferred that 30 % Tax slab now will be applicable on the part of total income which is above Rs. 10.00 lacs.

The budget also exempt up to Rs. 10,000.00 of interest income from tax.

There is no change in tax structure for woman and senior citizens.

In new amendment for AY 2013-14, deduction u/s 80CCF for purchase of notified infrastructure bond has been withdrawn.

Income Tax Rate as per Finance Act, 2012 for the FY 2012-13 or AY 2013-14

For Individual, HUF, AOP & BOI

Taxable Income	Male (Below 60 Years)	Female (Below 60 years)	Senior Citizen (60 -80 years )	Very Senior Citizen (Above 80 Years)
Basic Exemption	Rs. 2,00,000	Rs. 2,00,000	Rs. 2,50,000	Rs. 5,00,000
Rs. 2,00,001 to   Rs. 5,00,000	10% over Rs. 2,00,000	10% over Rs. 2,00,000	10 % over Rs. 2.5 lacs	NIL
Rs. 5,00,001  to Rs. 10,00,000	Rs. 30000 + 20 % over Rs. 5lacs	Rs. 30000 + 20 % over Rs. 5lacs	Rs. 25,000 + 20% over Rs. 5 lacs	20 % over Rs. 5 lacs
Over           Rs.    10,00,000	Rs. 1,30,000 + 30 % over Rs. 10 lacs	Rs. 1,30,000 + 30 % over Rs. 10 lacs	Rs. 1,25,000 + 30 % over Rs. 10 lacs	Rs. 1,00,000 + 30% over Rs. 10 Lacs.

Education cess @ 2 % and Higher Education cess 1%  will be in addition to above.

Income Tax Rate as per Finance Act, 2011 for the FY 2011-12 or AY 2012-13

For Individual, HUF, AOP & BOI

Taxable Income	Male (Below 60 Years)	Female (Below 60 years)	Senior Citizen (60 years & Above)	Very Senior Citizen (80 years & Above)
Basic Exemption	Rs. 1,80,000	Rs. 1,90,000	Rs. 2,50,000	Rs. 5,00,000
Rs. 1,80,001 to   Rs. 5,00,000	10% over Rs. 1,80,000	10% over Rs. 1,90,000	10 % over Rs. 2.5 lacs	NIL
Rs. 5,00,001  to Rs. 8,00,000	Rs. 32,000 + 20 % over Rs. 5lacs	Rs. 31,000 + 20 % over Rs. 5lacs	Rs. 25,000 + 20% over Rs. 5 lacs	20 % over Rs. 5 lacs
Over           Rs.    8,00,000	Rs. 92,000 + 30 % over Rs. 8 lacs	Rs. 91,000 + 30 % over Rs. 8 lacs	Rs. 85,000 + 30 % over Rs. 8 lacs	Rs. 60,000 + 30% over Rs. 8 Lacs.

No Surcharge, but Education cess @ 2 % and Higher Education cess 1%  will be in addition to above.

INCOME TAX SLAB FOR FY 2013-14 OR AY 2014-15

 

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