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TDS on benefit or perquisite under section 194R in Income Tax Act

Budget 2022 has introduced a new section for tax deduction at source (TDS) – section 194R of the Income-tax Act, 1961.

This section is applicable with effect from 1 July 2022.

To further clarify the scope of the section, the Circular 12 of 2022 was issued by the Central Board of Direct Taxes. Guidelines in QnA format have been released in this Circular. However, it is important to note that as per law, a Circular is not binding on the taxpayers and is only binding on the Income tax department officials.

With that said, let us discuss what the section says:

Section 194R states that TDS is to be withheld at 10% if specified person (deductor) provides any “benefit or perquisite” to an Indian resident exceeding Rs 20,000 in a financial year.

The limit of Rs 20,000 is to be calculated for each recipient in a financial year.

Specified persons mean:

1. Individual/ HUF having turnover exceeding Rs 1 crore or professional receipts exceeding Rs 50 lakhs in the immediately preceding year (i.e. FY 2021-22)

2. Partnership firms, companies and all other assessees (irrespective of turnover)

What is “benefit or perquisite”?

The terms have wide connotation. The intent of introduction of this section was to tax free samples given by businesses (especially pharma companies and hospitals giving free samples to doctors).

However, based on the language of the law and the Circular issued by the Income Tax Department, any type of benefit or perquisite given to an Indian resident will get covered.

Common examples include:

1. Free samples given to medical practitioners

2. Sponsoring trip for any client/ vendors and their relatives

3. Providing free tickets to client/ vendors for movies, sports, other events etc

4. Any incentives given in form of cash, gold, mobile phone, TV, computers, etc.

5. Free samples of products given to social media influencers on a non-returnable basis

6. Expenditure incurred on travel of consultants/ auditors where the invoice is not in the name of the company.

Dealer conferences are not in the scope of this section where the prime object of the conference is to educate the dealers about new products, address queries, sales discussions or reconcile accounts. However, two conditions are required to be fulfilled:

1. Conference must not be for selected dealers or customers who have achieved specified targets

2. Expenditure incurred for dealer’s family members or any leisure trip incidental to the conference will be considered as benefit or perquisite for section 194R.

If it is given in kind, then the valuation will be the market value of the benefit or perquisite (excluding GST).

If benefit given to a person in his capacity as employee of a company, TDS is to be withheld in the name of the employer company. If the benefit is given to a consultant of a company (i.e. not on payroll), TDS is to be withheld in the name of the recipient (i.e. consultant).

Conclusion

To conclude, the new provisions are going to come into force from 1 July 2022. Every benefit given to a third party should be monitored and extensive documentation is to be maintained for the same.

Should you require any further clarifications or have any queries, please do reach out to us at contact@vprpca.com

June 20, 2022
Form 10BD Statement of donations under Income-tax Act, 1961

Background

Sections 80G(5) and section 35(1A) of the Income-tax Act, 1961 (hereinafter referred to as the Act) requires furnishing of statement of donation received and the issue of donation certificates to the donors for claiming deduction from the gross total income.

This notification has framed the rules for furnishing such statements and certificates of donation to donors. For this purpose, Rule 18AB was inserted vide Finance Act, 2021.

Notified form

These statements in Form 10BD are required to be e-filed by a registered Charitable Trust with Income Tax before 31st May 2022 giving the following information about the donations received by it whether general or corpus:

Name of the donor

PAN/Aadhar/Voting Card/Election ID of the donor

Amount of Donation in Rupees

Type of donation

All donations need to be reported.

There is no threshold available.

In case of no such donations received by the trust, Income Tax Portal has not allowed to file a NIL Form 10BD.

The trust is required to upload a CSV file on its Income Tax login page. There the system will take 24 hours to accept/reject this form and Form 10BE (Certificate of Donations) can be downloaded. These certificates must be downloaded before 31st May 2022.

Verification

Form 10BD can be signed by the authorized signatory/trustee by using Digital Signature Certificate or electronic verification code.

Late Fees

Any delay in e filing Form 10BD attracts late filing fees of Rs. 200 per day (Section 234G). Section 271K attracts a penalty of Rs. 10,000 to Rs. 1,00,000 for failure to file a statement of donation in Form 10BD.

In case of any clarification or information, please feel free to write to us at contact@vprpca.com

May 29, 2022
The HUF Magic – Legally save lakhs of rupees in taxes

Going old school works.

Clients approach their Chartered Accountants (like us) to save taxes. And CAs like us advise clients to form an HUF and save lakhs in taxes over the years.

This form of tax planning is completely unique to India!

So what is the hype all about?

HUF stands for Hindu Undivided Family. There are three conditions to fulfill:

1. You are either a Hindu, Sikh or Jain

2. You must be married (not necessary to have kids)

3. The family must be undivided i.e. husband, wife and children (if any) must live together

If you fulfill all the three conditions above, congratulations! You are eligible to save a lot of taxes legally!

How does HUF help in saving taxes?

Let’s get down to the details. Here is all you need to know.

Features of HUF

1. HUF is treated as a separate person for the purpose of tax law. It has its own Permanent Account Number, bank account and files its own tax returns.

2. For income taxes, it is taxed at slab rates similar to an individual. Thus, first Rs 2.5 lakhs are exempt.

3. HUF is awarded almost all the same deductions as an individual. Example, if HUF takes out a life insurance for its members, a deduction under section 80C of the Income-tax Act, 1961 is available.

4. HUF has a separate bank account, PAN and own balance sheet.

5. HUF is created in many ways like through wills, gifts, inheritance. However, creation of HUF through gifts from the members is the most common way.

6. The head of the HUF is called as ‘Karta’ and the other members are called co-parceners.

7. HUF can make investments in its own name. It can be a shareholder of companies too. Thus, a separate demat account can be opened in the name of the HUF.

Who is ‘Karta’?

The ‘Karta’ is the senior-most male member of the family who is responsible for management of the affairs of the family.

In simple terms, ‘Karta’ is the head of the family.

Only a family member with coparcenary rights can become ‘Karta’. However, after Hindu Succession (Amendment) Act, 2005, a daughter has also been given coparcenary rights in the HUF property.

Tax planning must be done properly so as to avoid the income of HUF getting clubbed with the income of the Karta.

How does HUF help in saving taxes – an illustration.

Let us take family of Mr. Chandumal who earns a salary Rs 25 lakhs. He gets married this year to Mrs. Chandumal who earns a similar salary too. They pay taxes of roughly Rs 5,85,000 each.

The parents now want to gift ancestral property to their son and newly wed daughter-in-law.

Scenario 1: Mr Chandumal does not create an HUF

Mr. and Mrs. Chandumal receive ancestral property from his parents giving income of Rs 10 lakhs per year.

The income would get split evenly between the husband and wife i.e. Rs 5 lakhs is added to each of their total incomes.

The tax outgo for both Mr and Mrs Chandumal will rise to Rs 7,41,000 each for the entire year in their individual names.

To put it in perspective, an additional income of Rs 5,00,000 has increased their tax outgo by Rs 1,56,000. This is because of the higher tax slab of 30%.

Total tax outgo = Rs 14,82,000 (7,41,000 + 7,41,000)

Scenario 2: Mr Chandumal creates an HUF

The ancestral property is in the name of the HUF. The income of Rs 10 lakhs is taxed in the hands of the HUF and the return is filed separately too.

The HUF has to pay a tax of Rs 1,17,000 only.

Total tax outgo = Rs 12,87,000 (5,85,000 + 5,85,000 + 1,17,000)

Difference between Scenario 1 and 2 = Saving of Rs 1,95,000 every single year!

Using HUF for tax planning makes a lot of difference in creating the family wealth of Mr and Mrs Chandumal. It will help them achieve their financial goals faster.

Steps for creating an HUF

Step 1: Prepare a HUF deed

Though it is not mandatory, it is highly advisable (based on our practical experience) to have a deed. It helps the HUF sail smoothly in documentation requirements, especially while liaising with regulators and authorities.

The deed must create the name of the HUF. If Mr. Raj Mehra is creating an HUF, the name should be ‘Raj Mehra HUF’. Using any other iterations is not advisable.

It is advisable to seek professional assistance (e.g. CAs, lawyers) for creating the HUF deed to ensure it is bullet-proof and in compliance with laws.

Step 2: Create a rubber stamp

The Karta is the person who runs the HUF. A rubber stamp must be created (available at local stationery shops and online as well) in the name of the HUF. It is required for PAN and bank accounts.

It should read as under:

For Raj Mehra HUF

Karta

Step 3: Application for PAN

An Income Tax identification number is to be obtained for the HUF. A separate PAN application must be filed along with the HUF deed as proof of creation of HUF.

It takes nearly a week for the PAN to be allotted.

Step 4: Opening of bank account

After PAN has been allotted by the Income tax department, the Karta can proceed to open a regular bank account. The HUF deed, PAN card along with other details of the Karta should suffice as proof required by banks.

Step 5: Deposit money into bank account

Based on how the HUF is created (e.g. wills, gifts), the money can be transferred into the bank account of the HUF.

Remember, HUF is a separate entity in the eyes of the law.

Separate accounts are required to be maintained for an HUF. The tax return would be filed separately too.

It is always advisable to seek professional assistance in the creation and administering of HUF.

Thank you for reading.

In case of any clarification or information, please reach out to us at contact@vprpca.com. We shall be happy to assist you.

May 5, 2022
E-Dispute Resolution Scheme – Income Tax – All you need to know
On 5 April 2022, the Central Board Of Direct Taxes (CBDT) issued the e-Dispute Resolution Scheme, 2022 by the Dispute Resolution Committee on applications made for dispute resolution under Chapter XIX-AA of the Act in respect of dispute arising from any variation in the specified order by such persons or class of persons, as may be specified by the Board.

Key features
- Assessee who fulfils the specified conditions may, in respect of any specified order, file an application electronically for dispute resolution to the Dispute Resolution Committee designated for the region of Principal Chief Commissioner of Income-tax having jurisdiction over the assessee.
- Application shall be filed in the Form No. 34BC referred to in rule 44DAB within such time from the date of constitution of the Dispute Resolution Committee, as may be specified by the Board, for cases where appeal has already been filed and is pending before the Commissioner (Appeals); or within one month from the date of receipt of specified order, in any other case;
- Application shall be submitted by email to the official email of the Dispute Resolution Committee alongwith proof of payment of tax on the returned income, if available and accompany a fee of one thousand rupees.
- The Dispute Resolution Committee shall examine the application with respect to the specified conditions and criteria for specified order;
- Upon such examination the Dispute Resolution Committee, where it considers that the application for dispute resolution should be rejected, shall serve a notice calling upon the assessee to show cause as to why his application should not be rejected, specifying a date and time for filing a response;
- The decision of the Dispute Resolution Committee that the application for dispute resolution should be allowed to be proceeded with or rejected, shall be communicated to the assessee on his registered e-mail address;
- the assessee shall, within thirty days of receipt of the communication that the application is admitted be required to submit a proof of withdrawal of appeal filed under section 246A of the Act or withdrawal of application before the Dispute Resolution panel, if any, to the Dispute Resolution Committee or convey that there is no aforesaid proceeding pending in his case, failing which the Dispute Resolution Committee may reject the application.
Conclusion

A good move aligned with the intention to create ease of doing business for taxpayers. The challenge lies in the implementation. Communicating with tax department over email has proven to be a constant challenge under the faceless assessment regime. It remains to be seen how well this E-dispute resolution scheme can be implemented.

We would love to hear from you. Please get in touch at contact@vprpca.com
April 7, 2022
How to pay using UPI123Pay – Everything to know

The Reserve Bank of India (RBI) has launched Unified Payments Interface (UPI) service for feature phones called UPI123Pay.

At present, efficient access to UPI is available on smart phones. Considering that there are more than 40 crore feature phone (e.g. Nokia dabba phone) mobile subscribers in the country, UPI123pay will materially improve the options for such users to access UPI.

With this launch of new UPI for feature phones, Das added that it would help the National Payments Corporation of India (NPCI), an umbrella organization serving retail payments and settlement systems in India, reach its goal of processing a billion transactions a day.

UPI123Pay will also assist RBI to achieve its objective of a less-cash economy and financial inclusion.

Features:

Feature phone users will now undertake a host of transactions based on four technology choices. These include calling an IVR (interactive voice response) number, app functionality in feature phones, missed call-based approach, and also immediacy sound-based payments, the RBI stated.

Such users can make payments to friends and family, pay utility bills, recharge the FAST Tags of their vehicles, pay mobile bills, and allow users to check account balances. Adding customers will also link bank accounts and set or change UPI PINs.

Further, the 24×7 helpline ‘Digisaathi’ will assist the callers/users with their digital payments queries via the website and Chabot.

Users can visit www.digisaathi.info or call 14431 and 1800 891 3333 from their phones for their digital payments and grievances queries.

Distinct options:

App-based Functionality: App could be installed on the feature phones, allowing several UPI functions open on smartphones to be functional on feature phones.

Missed Call: By dialing a missed call on the number displayed at the merchant outlet, feature phone users will be capable of accessing their bank account and performing routine transactions such as receiving, transferring funds, regular purchases, bill payments, and so on. The customer will accept an incoming call asking them to verify the transaction by entering their UPI PIN.

Interactive Voice Response: UPI payment via pre-defined IVR numbers would necessitate users making a secure call from their feature phones to a pre-determined number and completing UPI on-boarding formalities before they could begin making financial transactions without the internet.

Proximity Sound-based Payments: This technology utilizes sound waves to permit contactless, offline, and proximity data communication on any device.

How to use UPI123Pay?

A shared server site library permits feature phone holders to use digital processes to transact.

The UPI123Pay feature does not require internet connectivity to transact online. Additionally, this service is available in various Indian languages.

The smartphone and feature phone users can now effortlessly transact digitally with the new facility.

UPI for feature phones is a three-step process call, choose and pay.

Before initiating to make the payment, it is required that the user links their bank account with the feature phone.

Further, using his/her debit card, they will be required to set a UPI PIN.

Once the UPI PIN is created, the user can use their feature phone for transactions just like a smartphone user.

The feature phone user needed to call on the IVR number and choose the phone relying on the service mandated such as money transfer, LPG gas refill, FasTag recharge, mobile recharge, balance check, etc.

To transfer the money, one will have to choose the phone number to whom money is to be transferred, add the amount, and enter UPI PIN.

To pay to a merchant, they can use an app-based payment method or missed call payment method.

They can also use the voice-based method to make digital payments.

Actual steps/ process for using UPI123Pay

#Dial the IVR number 08045163666 on your phone.

#On the IVR menu, select your preferred language.

#Now, choose the bank linked with UPI

#Press ‘1’ to confirm the details.

#Press ‘1’ to send money by using your mobile number.

#Enter the mobile number of the recipient.

#Confirm the details.

#Now, enter the amount that you want to transfer.

#Enter your UPI PIN and authorise the money transfer.

That’s it. That is how you use UPI123Pay!

Welcome to the new India.

March 17, 2022
Personal finances tasks for March

Because the month of March 2022 has already begun, Indian citizens must complete a number of financial responsibilities by the conclusion of the month. Several deadlines, such as the final day for submitting a belated or updated income tax return (ITR), the PAN-Aadhaar link, and others, are approaching in March. As a consequence, here are the six most crucial financial tasks to consider and do, if any are applicable to you.

Calculate your advance taxes

Missed the due date instalment of 15 March? You can still save some interest component by calculating the income for FY22 and paying taxes on or before 31 March 2022.

Section 234C interest is levied on each advance tax instalment. So if you have not paid your advance tax instalments on time, you will have to pay interest at 1% per month.

Section 234B interest is levied from 1 April till the date the tax is paid.

If you directly calculate your tax liability at the time of filing of filing your return (which happens in July), you will have to pay interest under both section 234B and section 234C.

So, it is advisable to compute your income and pay taxes on or before 31 March 2022.

Filing belated or revised Income Tax Return (ITR)

The deadline for filing a revised income tax return (ITR) is 31st March 2022. Following the epidemic of Covid-19, the government has extended the deadline for reporting updated ITRs for FY 2020-21 from December 31, 2021 to March 31, 2022. Also because the deadline for filing a belated or revised return for AY 2021-22 is March 31, 2022, you must submit your updated or belated ITR on or before that date to avoid a penalty under Section 234F of the Income-tax Act of 1961.

Aadhaar-PAN link

Following the government extended deadline from September 30, 2021 to March 31, 2022, Aadhaar linking with PAN is now possible till March 31, 2022. To avoid PAN becoming inactive, these two most important documents should be linked on or before the deadline. As a result of possessing an invalid PAN, you may be subject to a Rs 10,000 penalty under section 272B.

KYC compliance of bank accounts

The Reserve Bank of India (RBI) has set a deadline of March 31, 2022, for periodic updation of KYC in order to prevent restrictions on account operations for non-compliance. The account holder can avoid having his or her bank account suspended by satisfying KYC compliance.

Making contributions towards your tax saving instruments

As a tax saver, keep in mind that beginning in FY 2021-22, an individual can choose between the old and new tax regimes, making use of tax exemptions. As a result, it’s critical to make sure you’ve made the needed minimum contribution before the end of the fiscal year to keep your tax-saving instrument operational. As a result, you must ensure that you have successfully deposited the required contribution in your tax-saving instrument on or by March 31, 2022, or your tax-saving funds would become invalid and your tax liability for the fiscal year 2021-22 will be increased.

For any queries, feel free to reach out to us at contact@vprpca.com

March 16, 2022
All about Advance taxes under Indian Income Tax law

Every citizen of India is liable to pay tax if their income comes under the Income Tax bracket. The government depends mainly on its tax collection to finance its spending throughout the year. This funding is utilized in the development of nation, reforming infrastructure, and the betterment of society, which helps in shaping the economy of the country. There is a tax structure in India that is followed and as per the tax slabs; individuals are required to pay their taxes.

Let us understand about advance tax and how advance tax is calculated in India.

What is Advance Tax?

Advance tax is the amount of income tax that should be paid much in advance instead of lump-sum payment at the year-end in instalments as per the due dates given by income tax department. Advance tax is also known as ‘pay as you earn’ tax and is supposed to be paid in the same year the income is received.

Who Needs to Pay Advance Tax?

As per section 208 of Income-tax Act, 1961, a taxpayer needs to pay advance tax if their tax liability is 10,000 or more in a financial year.

Advance tax is for those who earn money from sources other than salary. It is applicable for self-employed individuals, professionals, and business men if their income exceeds a certain limit This includes money that comes from shares, interest earned on fixed deposits, rent or income received from house tenants. Senior citizens who are more than 60 years of age are exempt to advance tax.

How to Calculate Advance Tax?

Listed below are the 4 steps that will help you calculate advance tax:

1. Make an estimate of the total income earned by you.

2. Subtract all expenses from your income, including medical insurance premiums, phone costs, travel expenses, etc.

3. Now, add other income that you received apart from your salary. This includes interest from FDs, house rent, lottery earnings, etc.

4. If the amount of tax calculated is more than 10,000, then you are liable to pay advance tax.

How to Pay Advance Tax?

Just like regular tax payment, advance tax payment is also done using challan. There are many banks that allows you to pay advance tax through challans. You can also pay advance tax online from the comfort of your home. Here’s a step-by-step guide that will help you pay advance tax online without any hassles –

1. To pay advance tax online, you need to click on the government’s official website – http://www.tin-nsdl.com

2. Choose the correct challan that is ITNS 280, ITNS 281, ITNS 282 or ITNS 284 as relevant to pay your advance tax.

3. Fill in your PAN card details along with other important information such as your address, phone number, e-mail address, bank name, etc.

4. Once you have entered all the details, you will be redirected to the net-banking page of the website.

5. Now, you will receive all the information regarding your payment. Enter all payment details and pay your advance tax online successfully.

What are the Benefits of Advance Tax?

Here’s a list of benefits you get when you pay tax in advance –

1. It reduces the burden of paying tax at the last moment.

2. It helps in mitigating stress that a taxpayer may undergo while making tax payment at the end of fiscal year.

3. It saves people from failing to make their tax payments.

4. It helps in raising government funds as the government receives interest on the tax collected.

What are Due Dates for Payment of Advance Tax?

Here’s a schedule of advance tax payment for individual taxpayers –

15 June – 15% of advance tax liability

15 September – 45% of advance tax liability

15 December – 75% of advance tax liability

15 March – 100% of advance tax liability

1. What if I pay advance tax* less or more than required for a financial year?

The IT Act has provided four dates and the percentage of advance tax to be paid on each of these dates. If by chance you have paid the excess advance tax you would receive a refund subject to section 237 of the Income Tax Act with 6% interest per annum on the excess amount subject to Section 244A of the Act if the excess is more than 10% of the tax liability.

If on March 15, you find that you have a shortfall of advance tax to be paid you can still pay the advance tax before 31st March and the same would be treated as advance tax.

2. What is the penalty for missing the dates of payment of Advance Tax?

If you miss the dates for payment of advance tax you will be levied interest under section 234B and 234C of the Income tax Act.

3. Can I claim deduction under 80C while estimating income for determining my advance tax?

Yes, you can claim deduction under Section 80C while estimating income for determining your advance tax.

4. Is an NRI liable for payment of advance tax?

Yes, an NRI is liable for payment of advance tax on the income earned in India as per provisions of the Income tax Act in force for the relevant assessment year.

In case of any confusion or queries, please seek professional guidance.

You can reach us at contact@vprpca.com

March 9, 2022
IPO pricing by loss making companies – Reactive policymaking 101

Ever wondered how the shares of loss-making companies are priced?

Well yes, seems like SEBI has started wondering too.

But not before these huge IPOs have caused massive losses to the public.

Zomato is near its issue price, Paytm has eroded 2/3rds of investor wealth, so on and so forth.

Last Friday, the securities market regulator has come out with a consultation paper to tackle the issue of pricing of such IPOs.

First – what is currently being done?

At present, only few ratios like Earnings Per Share (EPS), price to earnings, return on net worth etc are required to be disclosed.

What is the problem identified by SEBI?

They say that these parameters are typically descriptive of companies which are profit making and do not relate to a loss-making firm.

What does the consultation paper propose?

In addition to the current ratios, additional disclosures of Key Performance Indicators (KPIs) to be made-

– relevant KPIs during the three years prior to the IPO and an explanation of how these KPIs contribute to pricing

– KPIs to be audited/ certified

– disclose all material KPIs that have been shared with any pre-IPO investor at any point of time during the three years prior to the IPO.

– Details of “immaterial” KPIs and their justification

– Comparison of KPIs with national/ global listed peers

It is far from being a law yet and is only open for the public comments.

Apart from KPIs, an issuer firm has been proposed to make disclosure of valuation of issuer company based on secondary and primary sale, in the 18 months prior to the date of filing of the DRHP/RHP.

This is subject to conditions where either acquisition or sale is equal to or more than 5 per cent of the fully diluted paid-up share capital of the issue firm in a single transaction or a group of transactions in a short period of time.

With reference to valuation of an issuer company based on secondary sale or acquisition of shares and primary or new issue of shares, Sebi has suggested disclosure of floor price and cap price being times the Weighted Average Cost of Acquisition (WACA) based on primary/ secondary transaction(s) should be disclosed in a tabular form.

SEBI also said that an issuer firm should offer a detailed explanation for offer price along with comparison of the issuer ‘s KPIs and financials ratios such as EPS, return on net worth and net asset value for the last two full financial years and the interim period, if any, included in the offer document.

This will enable the investors to have a comparative view of the KPIs and other financial ratios for the same period, as per SEBI.

This is another instance where the regulator has woken up after the public has been fooled.

Having said that, this is definitely a step in the right direction.

For any comments or queries, please reach out to us at contact@vprpca.com

February 22, 2022
The Budget and its tryst with startups

Does Budget 2022 do enough for startups?

The short answer is – No.

We saw the rise of 44 unicorns in India during the last calendar year itself. Studies have shown that raising funds for a startup in India has never been easier.

The Hon’ble Finance Minister used the words “digital”, “startups” and “technology” in historic proportions in Budget 2022. In one of the many firsts, the Speech also acknowledged that there are various on-ground challenges plaguing the startups and new businesses in India.

It was indicated that the Government will form an expert panel to look into the same and resolve those issues. This is a laudable move. Yet it gets us nowhere.

The tax and regulatory environment is not geared to handle the booming venture capital and private equity investment in Indian start-ups. It definitely helps to be officially recognized as a start-up which provides tax breaks, angel tax exemptions etc. under Income tax laws.

The official start-up recognition scheme is not completely inclusive as it requires the start-ups to be doing something “innovative” in order to qualify as a start-up. This has led to merely 54,000 registrations under the start-up scheme since past 6 years.

Mind you, over 1.5 lakh companies are incorporated each year alone in India. With a booming funding environment, investors are not selectively investing in “innovative” companies anymore.

Over the years, various round table discussions have been held with bureaucrats and even the Prime Minister and various industry representations have been submitted as well – all of which ask for widening the definition of a start-up.

The Budget 2022 was historic for start-ups but in many ways, it has actually done close to nothing.

February 2, 2022
Loan against PPF account balance – Key features, pros and cons
Public Provident Fund (PPF) is one of the most popular investment options in India, largely due to higher interest rates and complete Income tax exemption.

However, a lesser known feature is that one can obtain a collateral-free personal loan against PPF balance available at 1% interest rate.

We gain an insight on the key features, pros and cons of this product.

Key features
- The significant features of taking a loan against your PPF account are as follows:
- Account holders can avail this loan facility between the 3rd and 6th financial year from when PPF account was opened. The loan ends in the 6th FY since starting from the 7th financial year, the PPF account can be partially withdrawn.
- The loan amount is capped at 25% of the balance at the end of the second financial year preceding the year in which the loan was applied for.
- Interest is charged at 1% more than the interest earned on the balance in the PPF account. Once the interest rate is set for a loan, this rate will be applicable till the end of the tenure.
- In case the loan against the PPF account is not paid off within 36 months, the applicable interest rate will be hiked to 6% more than the interest earned on the PPF balance.
- The principal amount needs to be paid off first, followed by the interest accumulated. The interest amount should also be repaid in two monthly installments or lesser.
- If the principal is repaid within the loan tenure, but there is a portion of the interest amount that remains to be paid, then the outstanding amount will be deducted from the PPF account balance of the individual.
- It is not possible to avail a second loan on the PPF account until the first one has been paid-off completely.
Pros
- No collateral or mortgage required – You will not be required to pledge any asset in the form of a collateral when taking a loan against your PPF account.
- Repayment tenure of 36 months – The loan can be repaid within 36 months. This timeline is calculated from the first day of the month following the month in which the loan is sanctioned.
- Low interest rates – This is one of the most significant benefits of availing a loan against your PPF account. Interest rates are far lower than those of traditional personal loans from banks.
- Flexibility in repayment – The repayment of the principal amount of the loan can be done either in two or more installments (on a monthly basis) or as a lump sum.
Cons
- PPF loan is available at 1% interest rate but you will forego the interest accumulation on the loan amount. So the actual cost of a PPF loan is PPF interest rate plus 1%. At the current interest rate, a PPF loan would effectively cost you 8.1%.
- The time period is very limited. It may not be practical for some investors to require funds at such an early stage, except in case of emergencies
- You lose the compounding effect on the interest amount foregone due to the loan. WAs PPF loan is available in the earlier part (between 3rd and 6th FY), the compounding effect of the interest foregone will be much high at the time of maturity.
- Cumbersome compliances: PPF is largely a Government instrument and availing this loan carries considerable paperwork and compliances, as compared to a personal loan which is available in 3 seconds nowadays!
Conclusion

All in all, the loan against PPF balance has numerous restrictions while giving an attractive interest rate.

PPF should be seen as a retirement fund and withdrawals/ loan should be avoided, unless in case of emergencies.

However, it can prove to be better than a personal loan where interest rates sore as high as 20% p.a.

The information is purely general in nature and not intended to be an investment or financial advice. Please consult a professional for any advice before taking any action.

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January 23, 2022