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PPF has tax exemption

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TAX planning should ideally not be an obvious year-end phenomenon, but a well thought out exercise carried out throughout the year. With many types of tax-saving instruments available to individuals, the amount of investment which would be allowed for deduction from the taxable income is limited under the Income Tax Act,1961 (the Act) and, hence, one needs to plan intelligently.
 

One very popular example of a tax-saving instrument is the public provident fund (PPF). The PPF scheme is governed by The Public Provident Fund Act, 1968. PPF is outside the tax net throughout its life cycle, that is, it is exempt at each stage of investment (subject to the prescribed limits), accumulation and withdrawal.


Who can open a PPF account: As per the PPF scheme, any individual can subscribe to PPF . An individual can also subscribe to PPF on behalf of a minor if he or she is the guardian (father and mother). It has further been clarified that in the case of a minor child, either father or mother can open a PPF account on the child's behalf but not both. While the guardian individual can contribute separately to wards the PPF account of the minor, the total deduction that can be claimed by him under Section 80C is limited up to Rs 1,00,000.
 
A PPF account may be opened in a post office or any other bank specified in this regard.
 

It is important to note that non-resident Indians (NRIs) are not eligible to open a PPF account. However, if the PPF account was opened by such NRI while he was resident in India, then he may continue to subscribe to the PPF account till its maturity on a non repatriation basis.


Limit of subscription: The minimum amount that can be deposited by an individual in his PPF account every year is Rs 500, whereas, the maximum amount that can be deposited in a financial year (FY) is Rs 1,00,000, with effect from April 1 (Rs 70,000 was the earlier limit). The deposits can be made into the PPF account either in a lump sum or in flexible instalments. The amount and the number of instalments can vary, provided the instalments do not exceed 12 in one FY.

The amount deposited in the PPF account is allowed as a deduction from the total taxable income under Section 80C of the Act, subject to an overall limit of Rs 1,00,000 per FY.
 
Interest on the PPF account balance: The interest rate on the amount in the PPF account is decided by the government each year. The interest rate for the present financial year 2012-13 is 8.8 per cent. The interest earned on the PPF account is not liable to tax.
 
Tenure of PPF account: PPF can be closed at any time after the expiry of 15 years from the date on which it was opened. The whole amount in this account can be withdrawn at the time of closure which is tax exempt. There is also an option available to the individual to get his PPF account extended after the expiry of 15 years, each time for a block of five years.
 
Early withdrawal and loan facility: There is a lock-in period of five years in a PPF account, and an individual can withdraw money only at the end of the fifth year up to specified limits and subject to conditions.
 
An individual can also avail the facility of loan from third to the sixth financial year against the amount in his PPF account, subject to certain ceiling limits. Therefore, if a person invests in PPF during FY 2009–10, then he may avail the loan facility from the FY 2011–12 (which will be the third FY of subscription to the PPF scheme) up to FY 2014–15 (which will be the sixth FY of subscription to the scheme).
 
Since the investment made in PPF, the interest earned thereon and withdrawal are all tax-exempt, the net return from PPF is high, making it an attractive tax-saving instrument.
 
It is important to understand what tax slabs apply to you so that a better tax planning is done.

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