PPF and other post office savings schemes that offer income tax benefits

Many post office savings schemes offer income tax benefits to investors. The small savings schemes offered by post offices provide a secure and attractive investment option for small investors. The interest rate on small savings schemes are revised on a quarterly basis. Senior Citizen Savings Scheme (SCSS), 15-year Public Provident Fund Account (PPF), and National Savings Certificate (NSC), post office deposit schemes and Sukanya Samriddhi accounts are some of the popular savings options offered by post offices, catering to the various requirements of investors.

Some of the schemes offered at post offices which come with income tax benefits:

Public Provident Fund (PPF)

PPF accounts can be opened in banks or post offices. Contributions up to ₹ 1.5 lakh a year qualify for tax deduction under Section 80C of the Income Tax Act. A deduction reduces your overall tax liability. On maturity, the proceeds from the PPF are also tax-free. The PPF has a maturity period of 15 years and can be extended in batches of five years. From the seventh year, you can make partial withdrawals. Like other small savings schemes, the interest rate on the PPF account is pegged to government securities yields and are declared every quarter. Currently, the PPF offers a rate of 7.6% per annum.

The minimum amount that must be deposited in a PPF account in a financial year is ₹ 500 and the maximum allowed is ₹ 1.5 lakh. Deposits can be made lumpsum or in 12 installments. An individual can hold a PPF account in his name and even open one in the name of a minor, but the combined contribution cannot exceed ₹ 1.5 lakh in a financial year.

Sukanya Samriddhi Scheme

An annual deposit of up to Rs. 1.5 lakh in the popular girl child savings scheme Sukanya Samriddhi Yojana qualifies for tax deduction under Section 80C. The maturity proceeds are fully exempted from income tax. The maximum amount that can be deposited in a year is Rs. 1.5 lakh. The interest rate for the Sukanya Samriddhi Yojana is revised every quarter, like the PPF. For the July-September quarter, the rate has been set at 8.1%. Apart from post offices, Sukanya Samriddhi accounts can be opened in designated banks.

National Savings Certificates (NSC)

Another post office savings scheme NSC or the National Savings Certificate has a maturity period of five years. Currently, it fetches an interest rate of 7.6%, compounded annually. In other words, ₹ 100 invested in the NSC grows to ₹ 144.23 after five years. There is no upper limit for investment in the NSC and the minimum amount required is ₹ 100.

Deposits of up to ₹ 1.50 lakh in the NSC in a financial year qualifies for tax deduction under Section 80C. The interest is not paid to the investor each year but instead accumulates in the account. For income tax calculations, interest accrued yearly on NSCs is deemed to be reinvested on behalf of the investor and qualifies for deduction under Section 80C within the total limit of ₹ 1.5 lakh. However, since the final year’s or the fifth year’s interest is not reinvested, it cannot be claimed as a deduction from taxable income under Section 80C. Therefore, the last year’s interest income is added to the certificate-holder’s income and taxed accordingly.

Senior Citizen Savings Scheme (SCSS)

As the name suggests, an individual of the age of 60 years or more can open the Senior Citizen Savings Scheme account. An individual of the age of 55 years or more who has retired on superannuation or under VRS can also open a Senior Citizen Savings Scheme account subject to the condition that the account is opened within one month of receipt of retirement benefits and the amount should not exceed the amount of retirement benefits. The maturity period is five years and can be extended by three years. An individual cannot invest more than Rs. 15 lakh under this scheme.

Investment of up to ₹ 1.5 lakh in the Senior Citizen Savings Scheme qualifies for the tax benefit of Section 80C of the Income Tax Act but the interest earned is taxable. From this current financial year (2018-19), Section 80TTB of the Income Tax Act allows for a deduction up to ₹ 50,000 in respect of interest income from deposits held by senior citizens.

The Senior Citizen Savings Scheme currently pays interest quarterly at the rate of 8.3% per annum, with payouts at the end of each quarter. The rate of interest is subject to revision each quarter, like other small savings schemes.

Post Office Savings Account

This savings account facility offered by post offices pays out an interest of 4% per annum. Under Section 80TTA, interest income earned from savings accounts, including the Post Office Savings Account, up to Rs. 10,000 is tax deductible from the gross income.

From this financial year, senior citizens get a higher interest income exemption limit of ₹ 50,000 on deposits in banks and post offices, including recurring deposits. However, no deduction under Section 80TTA is allowed for senior citizens.

5-Year Post Office Time Deposit Scheme

The five-year post office deposit scheme is similar to tax-saving 5-year bank deposits, which have a lock-in period of five years. The sum deposited in these deposits qualifies for tax deduction up to ₹ 1.5 lakh per financial year. However, the interest income is taxable. There is no tax benefit under Section 80C on Post Office deposits with less than a five-year tenure. From April this year, interest received by senior citizens from deposits is exempt up to ₹ 50,000 under Section 80TTB. It does not matter whether the deposit is with banks or post offices.