Tax Benefits concerning Rent Paid, PPF and National Pension System
Tax benefits concerning rent paid, PPF and National Pension System are going to be discussed in this article. There are investment plans and other tax benefits which are available for salary earners that are often not enjoyed by the self-employed. In its effort at bridging this gap, the government has taken steps to provide some similar tax exemptions to the self-employed which will be critically discussed in this writeup.
WHAT ARE THE TAX BENEFITS IN RESPECT OF RENT PAID?
The Income Tax Act allows you to enjoy specific tax benefits in respect of rent paid which depends on whether your source of income is from salary or profits earned from your personal business. You are required by law to make tax deductions on rents paid which will be based on the situation at hand which we examine.
Under Section 10(13A) of the Act, as a salaried person, you are exempted from tax in respect of rent paid for an accommodation that you occupy if you are in possession of a House Rent Allowance (HRA).
The conditions for enjoying this tax benefit as a salaried person with an HRA and the value depends on the:
- Extent of HRA received
- Amount of rent paid in excess and over 10% of the salary
- 40% of the salary if the accommodation is not situated in a city and 50% if it is otherwise.
The Act under Section 80 GG provides for the self-employed and other salary earners who do not have any HRA for the rents paid in respect of the accommodation they occupy.
If you are under this group, you are required by law to make tax deduction claims of Rs 5000 per month which will be more than 10% of your total income which cannot exceed 25% of your gross total income.
Laying claims to these deductions depends on the accommodation and the area where it is located. It is important that your accommodation is situated in the same area where you work or own a business.
WHAT YOU SHOULD KNOW ABOUT PPF?
The Public Provident Fund PPF is an old initiative of the government which is aimed at providing security for your funds with high-interest rates. It has been very popular among investors with long-term investment plans.
To get the best from PPF, you will have to remain for as long as 15 years. However, the feature for the earlier closing of the PPF account has been added which was unavailable before now. Here are a few points of the information you need before opening a PPF account.
- The interest rate is compounded annually and is around 8.1% as at now.
- On the 31st of March of every year, you will receive the interest directly in your account.
- There is the possibility of having a higher interest if your deposits are made on or before the 5th of every month. This is because interests are calculated based on the lowest amount held on the 5th.
- There is the possibility for you to take a lone on your PPF account if you have held the account for a minimum of 3 years and on repaying the lone on time, you can be qualified for another.
WHAT ARE THE CONDITIONS FOR ALLOWING THE PREMATURE CLOSING OF THE PPF ACCOUNT?
The closing of the PPF account prior to the maturity period can only be permitted if the money will be meant for
- Payment for a person’s tertiary education
- Medical expenses which must be a life’s threatening case and must be backed by a concrete medical report.
WHAT ARE THE TAX BENEFITS FOR PPF?
The Employee Provident Fund (EPF) allows workers to enjoy tax savings and create a retirement fund which is unavailable for the self-employed. The EPF does not allow the salaried individuals to enjoy fully the benefits of the PPF even though the account can be opened by both the self-employed and the salaried individuals.
Beneficiaries of both EPF and PPF schemes are entitled to a tax deduction amount that can get to Rs. 1.50 lakh as provided under Section 80C of the Act.
The interest from this scheme plus the amount received on maturity are totally free of tax.
At the end of the year, the interest rate on EPF will be announced and it is usually higher than that of PPF accounts which is often announced every quarter of the year.
Between 2017 – 2018, the interest rate for EPF is at 8.55% p.a while that of PPF was 8% p.a for the quarter.
Contributions for your EPF are only made your account whereas in PPF, you can make claims of your tax benefits irrespective of the account you had been contributing into as provided under Section 80 C.
WHO IS ELIGIBLE TO INVEST IN PPF?
- ) Any citizen of India can invest.
- ) One person is entitled to one account except the other account in belongs to a minor.
- Non-residents of India and HUFs are not qualified to own this account.
WHAT ARE THE TAX BENEFITS UNDER THE NATIONAL PENSION SYSTEM (NPS)?
Pensions are paid to the employees of the government after their retirement. Employees under the PPF scheme can obtain their pensions on retirement. This facility is not available for the self-employed.
So far, the government has made movers to take its employees out of the defined benefits to the contributory pension benefits.
Through this, a self-employed individual can accumulate funds which would serve as his pension upon his retirement.
As a self-employed, you can make claims of tax benefits of 20% of your total income through contributions in the NPS.
In accordance with the provisions of Section 80 CCD, the limit for deductions under NPS is Rs. 1.5lakh p.a. As provided under Section 80 CCE and Section 80 CCD(1B) you can make additional tax claims that is up to Rs 50000 especially where the limit is exhausted without the contribution.
This additional benefit allows everyone to contribute up to Rs. 2lakhs.
WHO IS ELIGIBLE TO OPEN AN NPS ACCOUNT?
- ) It can be opened by Indian citizens that may or may not reside in the country.
- ) The owner or the account must be between 18 to 60 by age.
- ) The holder of the account must comply with the available KYC norms.
- ) An holder must be of sound mind and must not have a record of insolvency.
- ) It is mandatory for the owner of the account to buy an annuity with 40% of the total contributions and which the same amount cannot be withdrawn without any tax.
- ) The account owner can make tax payments with the remaining 20% or can buy an annuity with it.
Note that self-employed persons who receive their pension through annuity bought from insurance companies cannot claim a standard deduction that is up to Rs 40000.
WHAT ARE THE TYPES OF NPS ACCOUNTS THAT YOU CAN CHOOSE FROM?
The two types of accounts under NPS that you can choose from are:
- ) TIER 1 ACCOUNT: In this account, you cannot be permitted to make any withdrawal until the age of 60 except in situations which are very dicey.
- ) TIER 2 ACCOUNT: this is a voluntary savings account where you can withdraw your funds any time.
WHAT ARE THE KEY DIFFERENCES BETWEEN AN NPS AND PPF?
|Who can invest?||Any Indian that is within 18-60 years.||Any Indian citizen and that includes minors.|
|Can NRIs partake?||Yes||No, they cannot.|
|What is the lockdown period?||No fixed maturity period||It takes 15 years to mature.|
|What is the maximum and minimum investment limit?||No limit to the amount to be contributed but a minimum amount of Rs 6000 is required.||Rs. 500 is required annually for a minimum contribution while Rs. 150000 is for maximum contribution. Only 12 contributions are allowed per year.|
|Can I withdraw the money prematurely?||After a period of 10 years, an account owner can withdraw when the specific conditions arise. There is no exit before retirement except you will use 80% of the contributed funds to purchase a life insurance.||Partial withdrawals are permitted after 7 years of holding the account.|
|Do I have to buy an annuity?||When the funds mature, you will have to buy an annuity with 40% of the funds.||No|
|Will I be allowed to determine how to invest my money?||Yes||No|
|What are the rate of returns?||Interest rates are determined by the market, but the returns can be higher.||It is the government that decides the interest rates.|