Taxability of Interest Received on Public Provident Fund: A Guide

The Budget 2021, announced by our Union Finance Minister, Ms. Nirmala Sitharaman, has declared to levy income tax on the amount earned as interest by an employee or an assessee if the same is in excess of Rs 2.5 lakhs in a financial year. In this blog, we will talk about the taxability of Interest Received on Public Provident Fund.

Concept of Public Provident Fund

The term PPF or Public Provident Fund means a long term investment option that offers both attractive returns and rate of interest on the amount invested. Earlier, the interest earned on the said investment was not taxable under Income Tax. But the same has been made taxable if the interest earned is above Rs 2.5 lakhs.

Further, for the purpose of Public Provident Fund, the applicant needs to open an PPF Account with the bank.

Also, Read: Implications of Union Budget 2021 on Income Tax

Legal Framework of Public Provident Fund

The Central Government had introduced the concept of Public Provident Fund under the Public Provident Fund Act 1968. However, later on, the PPF Act 1968 was repealed by the government and PPF was merged with the Government Savings Bank Act 1873. Both the acts come under the ambit of the Government Savings Promotion Act.

Also, it shall be pertinent to mention that at present, PPFs are regulated and administered by the provisions of the Public Provident Fund Scheme 2019.

Things to Remember for Public Provident Fund

The things to remember for Public Provident Fund are as follows:

• According to the provisions of Sub Rule (2) of Rule 3 of the PPF Scheme 2019, a person can get an PPF account opened on behalf of another person, minor, or an unsound mind person (for whom he/ she is the guardian);
• Two or more persons cannot open a Joint Public Provident Fund Account;
• The minimum balance of the account should be Rs 500;
• A person can make a maximum investment of Rs 150000 in a year;
• 7.9% rate of interest is fixed by the scheme for the amount deposited in the Public Provident Fund Account, whether in a lump sum or in instalments;
• A subscriber or the investor has the right to withdraw the funds deposited after the expiry of the five years, starting from the date of opening the account;
• The premature closing of accounts is allowed under Rule 13 in the cases as follows:

1. Life threatening disease;
2. Change in residential status;
3. Higher education;

• One of the highlighting features of the PPF scheme is that the credit earned on the account is not qualified to be attached under any order or decree of the court under Rule 15;

Concept of Taxability of Interest Received on Public Provident Fund

The deposit made under the Public Provident Fund Scheme 2019 can be claimed as an exemption under the provisions of section 80 C of the Income Tax Act 1961. Further, such a contribution to the PPF scheme is regulated by section 2 (11) of the Income Tax Act.

Also, based on section 10 (11), an amount concerning to contribution made in the provident fund formed by the central government is exempted.

Moreover, under the provisions of section 80 C, the concept of Public Provident Fund comes under the category of EEE (Exempt – Exempt – Exempt) category, which means the interest, withdrawal and contribution on the amount are exempted from tax liability.

Amendments Introduced through Budget 2021

By way of the Budget for the Financial Year 2021 to 2022, the government has proposed to charge tax on the interest received on the contributions made to the provident fund if the same is in excess of Rs 2.5 lakhs.

However, based on the viewpoint expressed by professionals, the interest received on the amount invested in the PPF account will still be tax free as there is a limit of Rs 1.5 lakhs as an investment to the fund per year.

Therefore, the applicability of the tax provisions on the public provident fund would be nil due to the upper limit on the maximum amount of contribution made to the fund on an annual basis.

Conclusion

In a nutshell, the government has proposed to charge tax on the interest earned if the same is above Rs 2.5 lakhs. However, it shall be considerate to take into note that due to the upper limit provided on the maximum amount of contribution made, there will be no taxability of interest received on public provident fund.

Also, Read: Mutual Fund Participation in ETCDs: New Norms Introduced by SEBI