Public Provident Fund (PPF): Depositing Rs 1.5 lakh? Section 80C cushion fails here

Rajeev Kumar
Public Provident Fund, PF withdrawal, PPF tax benefit, PPF account, PPF maturity, PPF maximum limit, latest news on PPF

Public Provident Fund taxability, PPF tax benefit under Section 80C: Taxpayers can claim deductions up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Public Provident Fund (PPF) is one of the popular schemes that can help you claim this deduction but there are certain rules you should be aware of first. It is well-known that PPF comes in the "EEE" tax bracket, i.e., there is no tax on the amount invested in PPF account (subject to the maximum limit of Rs 1.5 lakh/year prescribed by Section 80C) interest earned and the amount withdrawn at the time of maturity.

The maximum limit of Rs 1.5 lakh under Section 80C implies that you cannot claim deduction on the full amount when the sum of your total contribution in PPF account and other schemes allowed under this section of the Income Tax Act is more than Rs 1.5 lakh in a financial year.

CA Abhishek Soni, Founder, tax2win.in, told FE Online today, "Section 80C covers many other tax-saving investments/ payments/ contributions like provident fund, life insurance premium, tuition fees, principal repayment of home loan, etc. but the amount of deduction is restricted to Rs.1,50,000."

"So if in case a taxpayer is making contributions to PF amounting Rs. 50,000 and PPF amounting Rs.1,20,000 then he can claim deduction u/s 80C for Rs.1,50,000 only even if his total contributions to specified avenues are Rs.1,70,000," he added.

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The lock-in period for PPF is 15 years. Soni said, "PPF is an attractive tax saving option from long term investment point of view."

PPF limit to increase?

It is expected that in the upcoming Budget, the government may increase the Section 80C limit from Rs 1.5 lakh to Rs 2.5 lakh and also increase the maximum PPF deposit limit to Rs 2.5 lakh. "The deduction under Section 80C has remained static since Finance Act, 2014. The section is meant to provide relief to individuals for specified investments and expenditure, while at the same time channelize investments into areas that support the economy. However, over the years, the scope of this deduction has become too wide as compared to its very modest limit such as-life insurance premium, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, tuition fees, principal repayment of housing loan etc," said Divya Baweja, Partner, Deloitte India.

It is expected that there will be an increase in these limits in line with the increased cost of living. Currently, Section 80C allows a maximum deduction of INR 1.5 lakh from the gross total, which generally gets exhausted through Provident Fund (PF) contributions, tuition fee expenses, payment of housing loan principal and life insurance premium. As such, the exemption limit under Section 80C can be enhanced from INR 150,000 to INR 250,000 which would provide tax savings in the range of INR 20,000 to INR 30,000 depending upon the level of income," he added.

Alternatively, the government should carve out a separate deduction for expenses such as children's tuition fees, life insurance premium and housing loan principal payments as compared to the investment-oriented items in that scope, Divya suggested.