As many of the Post Office Small Saving Schemes are used for tax saving purposes, there are some misconceptions among investors that the Post Office schemes are tax free.
However, it’s not necessary that for a scheme that gives tax-saving benefits, the interest or return on it will also be tax free.
There are very few Post Office Schemes that have both the features and they come under the EEE category (that is tax exemptions on investment, interest / return and maturity), but none of the Post Office schemes have only tax-free features.
As the interests / returns on many Post Office Schemes are not subject to Tax Deductions at Source (TDS), investors often think that these are tax-free schemes. However, taxpayers need to declare the interests earned on such schemes under the head Income From Other Sources while filing their Income Tax Returns (ITRs).
Following are the different savings and investment schemes offered by the Post Office and how they are taxed:
Public Provident Fund (PPF)
PPF has both tax-saving and tax-free features and comes under the EEE category. An investor may open an account and invest up to Rs 1.5 lakh in PPF in a financial year and claim deductions on the investment amount u/s 80C of the Income Tax Act. The interest on PPF and the maturity amount are also tax free.
Sukanya Samriddhi Yojana (SSY)
The parents or legal guardian of a girl child may open a Sukanya Samriddhi Yojana Account in a Post Office and deposit up to Rs 1.5 lakh in a financial year and claim deductions u/s 80C on the investment amount. Like PPF, with tax-free interest and maturity, SSY also has EEE features.
National Pension System (NPS)
The Post Office acts as POP (point of presence) for NPS service providers. So, investors who want to invest in NPS may visit a designated Post Office branch to open an account. Investors may claim deductions up to Rs 50,000 in a financial year u/s 80CCD(1B) for voluntary investments in NPS Tier-1 accounts.
The returns and lump-sum commutations from the retirement corpus under NPS are tax-free.
Post Office Savings Account
There are neither tax-saving benefits on deposits in Post Office Savings Accounts, nor the interests are tax free.
However, depositors can get tax exemptions on interest earned up to Rs 3,500 in single accounts and up to Rs 7,000 in joint accounts u/s 10(15)(i) of the Income Tax Act, apart from the Rs 10,000 exemptions available u/s 80TTA for individuals below 60 years of age and up to Rs 50,000 for senior citizens u/s 80TTB.
Interests earned on Post Office Savings Accounts are not subject to TDS and taxpayers need to declare the interests earned in their ITRs.
Post Office Time Deposits
Investors get tax-saving benefits up to Rs 1.5 lakh u/s 80C on investments made in 5-year Post Office Time Deposits. No tax-saving benefits are available on investments made for shorter terms.
The interest on Post Office Time Deposits are not tax free. However, senior citizen investors get exemptions on interest earned up to Rs 50,000 in a financial year u/s 80TTB.
Interest on Post Office Time Deposits over Rs 40,000 for individuals up to 60 years of age and over Rs 50,000 for senior citizens are subject to TDS, if Form 15G / 15H are not submitted.
Post Office Monthly Income Scheme Account (MIS)
There is neither any tax-saving benefit available on deposits in Post Office MIS Accounts, nor the interest earned are tax free.
Tax exemptions on interest earned are the same as that of Post Office Time Deposits.
Senior Citizen Savings Scheme (SCSS)
Senior Citizen investors get tax-benefits up to Rs 1.5 lakh u/s 80C in a financial year on investments made in Post Office SCSS.
While interest earned on SCSS are not tax free, the investors get exemptions up to Rs 50,000 on interest earned in a financial year u/s 80TTB.
Interests earned over Rs 50,000 is subject to TDS, if Form 15H is not submitted.
National Savings Certificates (NSC)
By investing in NSC, investors may get tax-benefits up to Rs 1.5 lakh in a financial year u/s 80C.
However, the interests earned on NSC are not only taxable, but the investors also need to declare the accrued interest under Income From Other Sources on yearly basis while filing their Income Tax Return (ITR) during the investment period as TDS is not applicable on NSC interest.
While calculating accrued interest is an issue, yearly declarations make tax payable lower than paying tax on cumulative interest in the year of maturity.
Kisan Vikas Patra (KVP)
Investors neither enjoy tax-benefits on investments in KVP, nor the interests earned are tax free.
Tax outgo would be more than NSC as the investors have to declare the cumulative interests earned in the ITR in the year of maturity as TDS is not applicable on KVP.