PPF taxation: Why the Public Provident Fund is a safe option to save tax; 5 things to know
tax saving many often turn to the Public Provident Fund (PPF). This is because of two key factors: the tax-free yearly interest and the annual compounding effect. The extended tenure of 15 years for PPF plays a significant role in amplifying the impact of compounding, particularly in the later stages of the investment period.
Further, because the interest earned is backed by a sovereign guarantee, it makes it a safe investment option.
It's essential to be aware that starting from the financial year 2020-21, individuals have the choice to opt for the old/existing tax regime, which includes various deductions and exemptions like those under sections 80C, 80D, 24, and more. Alternatively, they can opt for the new tax regime, which excludes these deductions and exemptions. If an individual chooses the new tax regime in the current financial year, they won't be eligible to claim commonly availed benefits such as deductions for investments in PPF, among others.
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So, if you select the old or existing tax regime, here is how investing in PPF can help you save tax under section 80C of the Income-tax Act, 1961.
Returns from PPF
The interest rates of small savings schemes are linked to yields of the 10-year Government Securities (G-Secs) in the secondary market. There are set formulae for mark-ups over the previous three months' average yield of relevant G-Secs of comparable maturity. The central government reviews the interest rates of small savings schemes every quarter based on the G-Secs yields of the previous three months. This is in line with the recommendations of the Shyamala Gopinath Committee, 2011 to ensure that the interest rates of small savings schemes are market-linked.
