Public Provident Fund (PPF): The PPF is a 15-year government-backed savings option offered through banks and post offices. Thereafter, it can extended further in batches of five years.
Why PPF is a good tax saving investment?
The interest rate on the PPF is revised every quarter and is benchmarked to yields on government securities. One can maximise their returns by investing early in the financial year so that the deposits can earn interest for the entire year. The interest that is received on the amount at the time of maturity is free from taxation. The invested amount is exempt from taxes at the time of investment, accumulation, and withdrawal. One can nominate someone in their PPF account and in case of no nominations, the rightful legal heir gets the amount in the fund at the demise of the account holder. The Central Government declares the PPF rate every year. The interest rate for PPF for the year 2018-19 is 8 percent. One can have only one PPF account in their name and no joint accounts are allowed. One can choose to make the deposits to their PPF either in instalments or in a lump sum deposit. The instalment, if chosen, has to be made in a maximum of 12 times in a year. The minimum investment is Rs 500 and max goes up to Rs 1.5 Lacs in a financial year.
What are the rules related to the PPF withdrawal?
A PPF account matures after completion of 15 years. However, in case of emergencies, certain sums of money are permitted to be withdrawn within 15 years. Such withdrawals are restricted by following rules.
- Withdrawals from the PPF account are permitted only after completion of 7 years from the day of creation of the PPF account. The withdrawal can be made at the start of the financial year.
- The amount of money that can be withdrawn is restricted to a certain amount.
- Only 50% of the closing balance at the end of the 4th year prior to the year when the money is being withdrawn or 50% of the closing balance of the previous year, whichever is lower will be the limit.
- If a loan has been taken from the PPF account, the loan amount will be deducted from the amount that can be withdrawn.
- Only one withdrawal is allowed per financial year.
Loan Facility for PPF Accounts
PPF loans are one of the best options to finance the short term requirements. The interest rates of PPF loans are available at rates below 11% per annum. Given below are the key benefits of PPF loans:
- The rate of interest on loans is roughly 2% more than the interest offered on the deposits. The Ministry of Finance has set the interest rate on deposits for this financial year at 8.7% per annum.
- Similar to personal loans, the borrower does not have to pledge his assets for obtaining a PPF loan.
- PPF subscribers can apply for loans only between the 3rd and 5th financial year from the date of enrolment. But the loan facility will be discontinued from 7th year.
- The loan sanctioned will always be 25% of the PPF Balance in account at the end of the fiscal year that preceded the application year.
- The principal amount is to be repaid within 36 months, either as lump sum or as periodic instalments.
- Only after repayment of the first loan can one apply for a second loan.
Should one invest in PPF even if one doesn't need tax saving?
PPF mobilizes small savings in the form of an investment, coupled with a return on it. It can also be called a savings-cum-tax savings investment vehicle that enables one to build a retirement corpus while saving on annual taxes. Anyone looking for a safe investment option to save taxes and earn guaranteed returns should open a PPF account . Major benefits of PPF are its tax-free yearly interest and the annual compounding. Since the PPF has a long tenure of 15 years, the impact of compounding is huge, especially in the later years. Further, because the interest earned is backed by sovereign guarantee, it makes it a safe investment. Therefore, linking one's investment in PPF to a long term goal such as retirement helps.
When should one invest in PPF to earn the max return?
The ideal way to maximize the interest on PPF account would be to invest Rs. 1.5 lakh (the maximum investible amount in a year) at one go at the beginning of the financial year. PPF accounts follow an April-to-March year so to earn the maximum interest, one should deposit the amount on/before 5th of April every year. A one-time deposit will earn interest for the whole year.
On the other hand, if one wants to deposit some amount every month, the it should be deposited on/before 5th of that month. This will help to earn interest for that month. A few hundreds earned extra every month turn into thousands as the PPF is a long-term saving option.
What percentage of one's investment should go in to PPF?
Since maximum investment possible in PPF is Rs 1.5 Lacs, it is advisable to deposit the entire amount in one go.
Voluntary Provident Fund (VPF): A version of traditional provident fund saving scheme wherein the contributor to the fund retains the control of periodical fixed contribution
Who can invest in VPF?
A VPF is an extension of the EPF. The VPF option is available only to salaried individuals who receive their monthly payments through a specific salary account. A salaried employee can voluntarily contribute more than the upper ceiling of 12% towards his/her PF Account which can go up to a maximum of 100% of the salary (Basic + DA). However, it should be noted that the investment in such scheme is not mandatory and an employee can opt to invest as per his own discretion and amount.
Should one go for VPF?
There are quite a few benefits of investing in VPF that includes:
·It is a Risk-free investment as the funds are managed by the Government of India which scales down the risk of default in repayment to zero.
·There is No mandatory contribution i.e. the saving towards the VPF is not mandatory and the employee can determine his/her contribution towards such scheme
·Presence of competitive rate of interest, that is to say the rate of interest is high as compared to the other debt oriented investment options
·It is an easy process which involves easy registration for VPF just by intimating your employer in a basic KYC form with the amount of deduction for VPF from salary
·It is a long-term investment and hence qualifies it to be a good retirement saving plan and a potential pension fund.
·It is Transferrable as every employee is assigned a UAN (Unique Account Number) linked with their EPF Account by the government
·It also has Loan option where the employee can avail loan for various purposes such as child’s education, child’s marriage, home loan repayment, etc.
There are majorly three reasons to opt for VPF:
VPF provides a better return
- The VPF yields the same interest rate as the EPF.
- Interest rates of all types of provident funds keep changing from time to time.
- While PPF rates are revised quarterly, VPF/EPF rates are revised annually
Investing in VPF is easy
- The investment in VPF is easy as once an instruction is given to the office accounts department, one doesn’t have to do anything till it’s time to change the job.
- A fixed amount, decided by the individual, will be deducted from his/her salary every month. This ensures investment discipline while making savings easy.
- Even when the individual changes a job, their EPF/VPF account is transferred using a single UAN of EPFO.
VPF gives you the same tax benefits as PPF
- Contribution towards the VPF is eligible for full tax deduction under Section 80C.
- Just like the PPF, it enjoys the highest EEE (exempt-exempt-exempt) category of tax deduction.
- Hence the investment in the VPF is tax free and so is the interest earned as well as the entire corpus at the time of withdrawal.
- However. VPF withdrawals are tax exempt only if one has been in service for more than 5 years.
What are the taxation rules regards to VPF?
Following are the tax benefits offered by VPF
- The contribution is deductible up to a maximum of Rs 1.5 Lakhs per annum under section 80C.
- The interest received is exempted up to 9.50% under the Income Tax Act, 1961.
- The proceeds of VPF upon maturity is tax-free.
When can one withdraw from VPF?
The VPF has the same lock-in period as the EPF i.e. on resignation or within 2 months of unemployment. Partial withdrawal is allowed, but the withdrawal amount is tax-free only if the account is at least 5 years old.
Sukanya Sumriddhi Scheme: an account can be opened any time after the birth of a girl till she turns 10, with a minimum deposit of Rs 250 (Earlier is was Rs1,000)
Should one invest in it?
From a tax benefit point of view, it offers the following benefits:
- Investments made in the SSY scheme are eligible for deduction under Section 80C , subject to a maximum cap of Rs 1.5 lakhs. There is no limit on the number of deposits either in a month or in a financial year.
- The interest that accrues against this account which gets compounded annually is also exempt from tax
- The proceeds received upon maturity/withdrawal are also exempt from income tax
(Sukanya Samriddhi account will mature on completion of 21 years from the date of opening of account)
From a social point of view,
SSY aims at tackling a major problem associated with the girl child, i.e. education and marriage.
SSY aims at securing a bright future for the girl child in India by facilitating the parents of a girl child in building a fund for proper education and care-free marriage expenses of their girl child.
SSY also aims at achieving the following:
- To stop gender discrimination of children and abolish the practice of sex determination.
- To ensure the survival and protection of girls.
- To ensure higher participation of girls in education and other areas.
What are the recent changes?
Under the new rules, known as Sukanya Samriddhi Account (Amendment) Rules, 2018 , the minimum amount required for opening a Sukanya Samriddhi account has been brought down to Rs 250, from Rs 1,000. The minimum annual deposit requirement, or the minimum amount required to be deposited in Sukanya Samriddhi account every year, has also been lowered to Rs 250, from Rs 1,000 earlier. These new rules came into effect from July 6, 2018.
Senior citizen saving schemes: Investment option available for senior citizens as well as early retirees
What are merits of SCSS?
Following are the benefits/merits of investing in SCSS:
- Safe and Reliable: This is an Indian government-sponsored investment scheme and hence is considered to be one the safest and most reliable investment options.
- Simple and easy process: The process to open an SCSS account is simple and can be opened at any authorized bank or any post office in India. It is also transferable across India.
- Good returns: At 8.6 % the return rate is very good as compared to a savings or FD account.
- Nomination: Nomination facility is available at the time of opening an SCSS account by means of submitting an application as part of Form C. This submission is also accompanied by the passbook to the Branch.
- Tax benefits: Tax deduction of up to Rs 1.5 lakh can be claimed under Section 80C of the Indian Tax Act, 1961.
- Flexible: The tenure of this investment scheme is flexible with an average tenure of 5 years which can be extended up to 3 additional years.
What should one know before investing in SCSS?
- An SCSS account can be opened by an individual who is above the age of 60. Any individual, who has opted for a voluntary retirement scheme or retired between the age group 55 and 60 years, can opt for this scheme within one month of retirement. For defence personnel, the retirement restriction has been lowered to 50 years or more.
- An individual can operate more than one account individually or jointly, subject to the Rs 15 lakh deposit limit in all accounts put together. A joint account is allowed only with one's spouse. An individual cannot open a joint account with his son or daughter.
The Rules of Senior Citizen Saving Scheme
- You have to be 60 years of age or above. In particular situations, people falling in the category of 55 years and above can enrol.
- There is only a single deposit permitted in your Senior Citizen Saving Scheme account. The deposit amount must be in the multiples of Rupees 1,000 and the maximum investment amount is Rupees 15 Lakh.
- The interest accumulated in a Senior Citizen Saving Scheme account is paid on 31 March/30 September/31 December at the first time and after that, it is payable at 31 March, 30 June, 30 September and 31 December every year.
- The maximum time period of SCSS is five years. Although, once maturity is attained, this duration can get extended for a time period of three years.
- An account holder can enrol in various accounts at the same time. It can be individual as well as a joint account with his/her spouse. Although, the account holder must make sure that all eligibility criteria catering to the operation and validity of such accounts are fulfilled. The minimum balance must be maintained as well.
- Cash is an accepted mode of investment in case the amount is lesser than Rupees 1 Lakh. In case this amount is greater than Rupees 1 lakh, then cash isn’t accepted. The account holder must make the payment using a cheque.
- An account can be very easily and conveniently transferred from one post office or bank to the other.
- SCSS offers the facility of nomination which can be easily availed when you open an account or after your account has been active for a particular time period.
- In case the account holder wants to terminate his/her account before maturity then the applicable penalty is-
- After 1 year- 1.5 percent of the invested amount
- After 2 years- 1 percent of the invested amount.
- Keep in mind that premature closing of the SCSS account is possible if the account has remained active for the minimum period of 1 year.
- If you wish to have a joint account, the main account holder is considered as the investor and the second account holder can only be the primary account holder’s spouse.
- In case the accumulated interest on the deposit amount is above Rupees 10,000 per year, tax is deducted at source.
- The accumulated interest is deposited in a savings account which is maintained at the post office or bank, where the SCSS is maintained.
- The investments made in the SCSS account offers tax benefits according to the provisions of Section 80C of the Income Tax Act, 1961.
What are the TDS norms?
Since the interest income is taxable, an investor must take reasonable care about the tax deducted at source (TDS). Investment in Senior Citizen Savings Scheme qualifies for income tax deduction under Section 80C of the Income Tax Act . A TDS, or tax deducted at source, is applicable on an interest amount above Rs. 50,000 per annum, according to Budget 2018-19. That means the Senior Citizen Savings Scheme offers a tax-free income up to Rs. 50,000 in a financial year. In other words, from the current financial year, Section 80TTB allows for a deduction up to Rs 50,000 in respect of interest income from deposits held by senior citizens. If the total income is within the prescribed limit, one may choose to provide a 15H declaration to avoid TDS.
Tax saving Fixed deposit
- These deposits have a lock-in period of 5 years. Premature withdrawals and loan against these FD's are not allowed.
- A person can invest in these FD's through any public or private sector bank except for co-operative and rural banks.
- Investment in Post Office Time Deposit of 5 years also qualifies for deduction under section 80 (C) of the Income Tax Act, 1961
- Post Office Fixed deposit can be transferred from one post office to another.
- One can hold these FD's either in 'Single' or 'Joint' mode of holding. In the case the mode of holding is joint, the tax benefit is available only to the first holder.
- The interest earned is taxable as per the investor's tax bracket and therefore, TDS is applicable
- Nomination facility is available for these FDs.
- Most banks offer slightly higher interest rates on FDs to senior citizens.
Who should go for it?
Only Individuals and Hindu Undivided Families (HUFs) can invest in tax saving FD scheme. Hence anyone looking for a shorter lock-in period and seeking a guaranteed return tax-saving option should invest in these fixed deposits
What are the TDS norms related to tax saving fixed deposits?
The interest earned is taxable as per the investor's tax bracket and therefore, TDS is applicable. The interest on deposits is payable on either monthly/quarterly basis or can be reinvested. A person can avoid TDS deduction on the interest earned by submitting Form 15G (or Form 15H for senior citizens) to the bank. Senior citizens can claim deduction of Rs 50,000 on the interest earned from deposits as per the newly inserted section 80TTB.
Following are the norms:
- Tax liability for TDS purpose is determined at branch level.
- Deposits held by minors are also subject to TDS.
- The credit for the TDS can be claimed by the person in whose hands the minor's income is included.
- One becomes liable for TDS when the aggregate interest earned for all deposits held in a particular customer ID is greater than Rs. 10,000/- in a financial year.
- TDS is deducted every time the Bank pays/re-invests interest during the financial year.
- When interest amount is insufficient to recover TDS, the same is recovered from the principal of the deposit.
- in case of reinvestment deposits, the interest reinvested is post TDS recovery.
- If the change or enhancement in a deposit portfolio earns a cumulative interest along with that of the earlier portfolio is greater than Rs. 10,000/- it will be liable for TDS on the current portfolio.
National Savings certificate
How good is National savings certificate as a tax saving option?
Benefits and Features of NSC are as follows:
- Fixed income: It gives guaranteed returns and hence a regular income is guaranteed
- Types: The scheme originally had two types of certificates – NSC VIII Issue and NSC IX Issue. The Government discontinued NSC IX Issue in December 2015. So, only the NSC VIII Issue is open for subscription currently.
- Tax saver: As a government-backed tax-saving scheme, one can invest for up to Rs 1.5 lakhs to claim the benefits of 80C deductions.
- Start small: One can invest as small as Rs. 100 (or multiples of 100) as an initial investment, and increase the amount when feasible.
- Interest rate: Currently, the rate of interest is 8% for the quarter 1 October 2018 to 31 December 2018 (annually) prior to which the rate of interest stood at 7.6% – the government revises this rate every quarter.
- Maturity period: There are two maturity periods to choose from – one for 5 years and the other for 10 years.
- Access: One can purchase this scheme from any post office by submitting the necessary documents and doing the KYC process . It is easy to transfer the certificate from one PO to another too.
- Loan collateral: Banks and NBFCs accept NSC as a collateral or security for secured loans. To do this, the concerned post master should put a transfer stamp to the certificate and transfer it to the bank.
- Power of compounding: Interest gets compounded and reinvested by default, though the returns do not beat inflation.
- Nomination: Investor can nominate a family member (even a minor) so that they can inherit it in the unfortunate event of the investor’s demise.
- Corpus after maturity: Upon maturity, one will receive the entire maturity value. Since there is no TDS on NSC payouts, the subscriber needs to pay the applicable tax on it.
- Premature withdrawal: Generally, one cannot exit the scheme early. However, they accept it in exceptional cases like the death of investor or with the court order.
This scheme allows complete free taxation on interest except for earned interest in the last year. No upper limit has been mentioned for the investment. Duplicate certificates will be arranged in case of losing the original. The sum invested in the NSC is eligible for tax deduction under Section 80C up to the Rs 1.5 lakh limit stipulated in a financial year, including the accrued interest on the existing certificates. Since the interest earned on the NSC is automatically reinvested, it can be claimed as a deduction under Section 80C. But if the accrued interest is not added to the Rs 1.5 lakh deduction under Section 80C, then the entire income is taxable on maturity
Who should invest in NSC?
The scheme is open to only Indian individual citizens. Hence Hindu Undivided Families (HUFs) and trusts cannot invest in it. Furthermore, even non-resident Indians (NRI) cannot purchase NSC certificates. Anyone who is looking for a safe investment avenue to save taxes while earning a steady income can opt for this scheme. The NSC offers guaranteed interest and complete capital protection.
Tags :income tax