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The Public Provident Fund has been the darling of tax saving instruments all these years. Now, though, questions abound if it will continue to hold such favour with investors.
That depends on what changes the finance minister plans to implement this Budget.
Here's a look at the questions many are asking.
Will the interest rate drop?
The interest rate on the PPF has been gradually lowered over the years (much to the dismay of millions of investors).
It was initially 12% per annum. It dropped to 11%, then 9.5% and is now 8%. This rate of interest is fixed (and changed) by the government.
The decline in the PPF's interest rate was in keeping with the change in the economy. Interest rates have decreased over the years and it was only natural that the PPF followed suit.
Will it be lowered this Budget?
Most probably no. It will stay the same. It will neither increase nor decrease.
Will the limit increase?
Currently, the limit is fixed at Rs 70,000 per financial year.
Many believe that since the PPF falls under Section 80C and the limit under this section is Rs 1,00,000, the limit on the PPF will increase from Rs 70,000 to Rs 1,00,000 per financial year.
This will give investors the option of investing the entire Section 80C amount in the PPF.
For instance, investors can invest the entire Rs 1,00,000 in Equity Linked Saving Schemes. These are diversified equity mutual funds that offer a tax benefit.
However, this PPF limit is not likely to change; it is expected to stay at Rs 70,000.
Will it be taxed on withdrawal?
To understand that, let's look at the situation currently.
What we have now
Simply put: Exempt-Exempt-Exempt. In abbreviation form, EEE.
What it indicates:
1. Tax exemption on contributions.
2. Tax exemption on interest earned.
3. Tax exemption on withdrawals.
With the PPF, you get a tax exemption on your contribution, the interest earned is tax free and on withdrawal, you pay no tax.
The PPF is totally tax-free. It can't get better than this. But it can certainly get worse.
How bad?
The future is EET.
What we may have
EET is just Exempt-Exempt-Tax (as against Exempt-Exempt-Exempt).
What it indicates:
1. Tax exemption on contributions.
2. Tax exemption on interest earned.
3. When we withdraw the amount, it will be taxed.
Why the change?
The Kelkar Committee Report on Direct Taxation had recommended that the PPF's EEE status be changed to EET, where tax is levied at the withdrawal stage and not during contribution or accumulation.
However, various issues have to be sorted out such as:
1. Should earlier contributions be taxed?
2. At what rate must they be taxed?
There is no saying whether this will take place in the Budget later this month or in next year's Budget. The only think we know is that it will happen for sure, eventually.
Will that make PPF better than the National Savings Certificates?
The similarities
1. Promoted by the government of India and hence totally safe.
2. Earns an interest of 8% per annum.
3. Interest paid only on maturity.
4. Deduction under Section 80C.
The difference
1. The PPF has a lock-in of 15 years while NSC has a lock-in of six years.
2. The interest is compounded annually for the PPF and half-yearly for NSC. The more frequently it is computed, the better. So NSC scores on this front.
Currently, the lure of the PPF is that the interest is not taxed. This is the main reason why the PPF is preferred to NSC.
The interest earned on NSC is included as income under the head 'Income from other sources'.
In case you were unaware, the various heads of income are:
i. Salary
ii. Income from house property
iii. Capital gains
iv. Profits and gains from business or profession
v. Income from other sources
If the PPF begins to get taxed in the same way, NSC may end up being a better option. Simply because you lock your money for a shorter time frame and the interest is compounded more frequently.
Let's wait and watch.