PPF is one of the most common and the safest government-backed tax-saving investment instruments. However, are premature withdrawals from a PPF account taxable?
Public Provident Fund (PPF) is one of the most common and the safest government-backed tax-saving investment instruments. Both salaried as well as non-salaried resident individuals can invest in PPF as against Provident Fund (PF), which is for salaried people only. A PPF account can be opened both in a post office or a bank and can be transfered also.
PPF has a lock-in period of 15 years, which starts from the beginning of the first financial year. The interest rates on PPF keep on changing every year and normally stay around @ 8%. “PPF returns are compounded annually. This means interest would be earned on your second year’s deposit and the first year’s interest as well. The minimum amount that needs to be deposited every year to keep your PPF account active for 15 years is Rs 500. However, a restriction of Rs 150,000 has been placed in respect of the maximum amount that can be deposited during a year,” says CA Abhishek Soni, Founder, tax2win.in.
PPF is one of the tax-friendly saving instruments. It falls in the category of EEE (Exempt Investment, Exempt Return, Exempt Maturity or Withdrawal). In simple words, you get a tax deduction under Section 80C for the amount you invest every year in the PPF account. In addition to that, the interest on the amount invested is also tax exempt. Moreover, the amount you get at the maturity is also tax exempt. Thus, both the deposits and withdrawals are totally tax free.
“Premature withdrawals of your investments can also be done as per the applicable rules. The maximum amount that can be withdrawn is equal to 50% of the amount that stood in the account at the end of the 4th year preceding the year in which the amount is withdrawn or the end of the preceding year, whichever is lower,” says Soni.
Let’s go through the process of premature withdrawals from a PPF account with the help of the following example:
Suppose you started your PPF account with an amount of Rs 10,000 in January 2018. “This account will be eligible for partial withdrawal from 1st April, 2023. At the end of the 4th year, your closing balance shall include the investment made till four years as well as the compounded interest on it. As soon as you complete 6 years in the scheme, you would be eligible to withdraw 50% of the closing balance of the 4th year,” says Soni.
Additionally, the PPF account can be closed prematurely on the various specified grounds like medical emergencies, higher education needs etc. However, you cannot close your PPF account before 5 years even in case of exigencies. Further, you can also avail the facility of loan against your PPF deposits from 4th to 6th year of deposit as per the prescribed condition.
Through the saving and investment schemes like PPF, the government tries to give priority to the interest of small savers who form the backbone of India’s savings architecture. So, it makes sense to invest in PPF where you can avail facilities like loan and premature withdrawals along with a good rate of return!