In this article we are discussing upon the double benefits a tax payer can avail under the Indian personal income tax laws. One need not wonder how this is possible and what are the dual benefits? The dual benefits are tax savings coupled with higher returns on investment. Also it does not require much of a financial expertise. An income tax payer with a little knowledge of his income computation and tax calculation can easily understand the tax saving legally.
A tax payer after computation of his total income has to do some tax planning may be with the help of his chartered accountant (financial consultant). Here we are suggesting an investment made in Public Provident Fund (PPF) will not alone save the tax legally but also yield him returns in the form of compound interest annually.
With the financial year 2006-07 coming to a close it is a final chance to save tax by making investments in instruments that are eligible for a tax break. Hereâ€™s a look at what one such avenue – Public Provident Fund â€“ has to offer.
Apart from the statutory deduction in the form of Provident Fund (PF) as an employee contribution to Provident Fund for salaried persons, a tax payer can benefit from a tax break if a contribution to Public Provident Fund (PPF) is made. This contribution is voluntary and there is a maximum limit of Rs 70,000 per year that can be invested along with other eligible investments/expenditures (u/s 80C of Income tax act) will be clubbed together for a tax deduction of not more than a sum of Rs 100,000.
The advantages of investing in PPF are,
* The interest earned on PPF account is completely tax free.
* The tax free rate of interest at 8 per cent is comparatively higher than most other fixed income tax saving instruments.
Some constraints and benefits for the investor or tax payer are,
* Once invested in PPF, the amount gets blocked for a period of 15 years.
* The investor can, however, withdraw some amount from his account after the completion of the sixth year, subject to prescribed conditions.
* From the seventh financial year onwards, each year the investor can withdraw up to 50 per cent of the balance at the end of the fourth preceding year or the year immediately preceding the withdrawal whichever is lower. The tax payer or the investor is also allowed to take a loan against PPF balance, subject to limits.
* The minimum amount permissible for investment in PPF is Rs 500 and the maximum amount permissible is Rs 70,000, per person, per annum. The limit of Rs 70,000 is not prescribed in the Income Tax Act but it is prescribed in the Public Provident Fund Scheme.
One is entitled to get deduction from taxable income to the extent of Rs 70,000 per financial year, irrespective of whether the tax payer has made a contribution to PPF account or the PPF accounts of spouse or child irrespective of whether he or she is a minor / major, dependent / independent, married / unmarried.
Since the overall ceiling of PPF contribution per person per annum is Rs 70,000, one can derive a further benefit from the PPF scheme by gifting surplus funds to spouse or major child so that they can contribute to their PPF accounts and claim a deduction of up to 70,000 per account per annum, in case they are filing their tax returns. In case they do not file their returns, it will merely build up their capital base for the future.