My parents are continuously investing in Public Provident Fund to avail deductions in Old Tax Regime. What happens if they shift to new regime?

Senior and non-senior family members of my family, including my father, mother, uncles, with only interest income, which is less than the taxable income, are consistently investing in PPF and claiming deductions under section 80C under the old tax regime. With the new regime, the limit has been raised to Rs 12 lakhs, which raises two questions:

> For those individuals whose PPF account is maturing this year, is it more beneficial to withdraw the money from the PPF account and switch from the old regime to the new regime with a Rs 12 lakh limit rather than extending the PPF account? The rationale behind this decision is the 7.10% interest rate along with the lock-in period.

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> The funds allocated to debt can be invested elsewhere. With regard to the EEE status, it is anticipated that it will transition from EEE to EE in the near future.

Advice by Niyati Shah, Vertical Head - Personal Tax at 1 Finance

Q. For those individuals whose PPF account is maturing this year, is it more beneficial to withdraw the money from the PPF account and switch from the old regime to the new regime with a Rs 12 lakh limit rather than extending the PPF account? The rationale behind this decision is the 7.10% interest rate along with the lock-in period.

A. Yes, for individuals who no longer benefit from Section 80C deductions under the new tax regime, fresh contributions to PPF with an interest rate of 7.1% per annum may not be as beneficial. However, the accrued balance remains tax-free upon withdrawal. Accordingly, if the PPF account is maturing this year, withdrawal might be a viable option. The rationale lies in the 7.1% interest rate, which may not be as attractive compared to other debt instruments with better liquidity and tax efficiency.

Q. Additionally, the funds allocated to debt can be invested elsewhere. With regard to the EEE status, it is anticipated that it will transition from EEE to EE in the near future.

A. While there is speculation about a shift from the Exempt-Exempt-Exempt (EEE) status to Exempt-Exempt (EE), no official announcement has been made. If such a shift happens, PPF maturity proceeds may become taxable in the future. Withdrawing now could help mitigate future tax risks.

Q. For individuals who have already extended their PPF account or have a few years left until maturity, is it advisable to contribute the minimum Rs. 500 and allocate the remaining funds to other debt instruments? Once again, the reasoning behind this decision mirrors that of the previous point.

A. Yes, contributing the minimum Rs. 500 to keep the PPF account active while reallocating surplus funds to other debt instruments is a prudent strategy. Alternatively, if five years have passed since opening the PPF account, withdrawing up to 50% of the balance could be beneficial. Given the anticipated shift from EEE to EE status and the lack of deductions under the new regime, diversifying into higher-yielding instruments such as government bonds and debt mutual funds (with indexation benefits where applicable) could be considered. These alternatives offer better financial flexibility by avoiding lock-in constraints.

If an individual prioritises liquidity and better returns, withdrawing the matured PPF and reallocating funds could be a strategic move. However, for those seeking risk-free, tax-free returns, extending the account (with or without contribution) remains a strong option.

Income Tax slabs from April 1, 2025

Tax slabs under New Tax Regime for 2025

Income up to Rs 4 lakh: Nil

Income from Rs 4 lakh to Rs 8 lakh: 5 per cent
 
Income from Rs 8 lakh to Rs 12 lakh: 10 per cent
 
Income from Rs 12 lakh to Rs 16 lakh: 15 per cent
 
Income from Rs 16 lakh to Rs 20 lakh: 20 per cent
 
Income from Rs 20 lakh to Rs 24 lakh: 25 per cent
 
Income above Rs 24 lakh: 30 per cent

The new tax regime offers deductions in two specific areas:

Under Section 24(b), individuals can claim a deduction for interest paid on housing loans for rental properties.
In addition, Section 80CCD (2) allows for deductions for employer contributions to the National Pension Scheme (NPS), capped at 14% of the employee's salary.

Tax slabs under the old tax regime:
 
Income up to Rs 250,000: Nil
 
Income from Rs 250,001 to Rs 5,00,000: 5 per cent
 
Income from Rs 5,00,001 to Rs 10,00,000: 20 per cent
 
Income above Rs 10,00,000: 30 per cent
 
The old tax system offers multiple deductions, such as:

Section 80C: Allows deductions of up to Rs 150,000 for investments in PPF, ELSS, and LIC premiums.
Section 80D: Provides deductions for health insurance premiums.
Section 24(b): Offers deductions for home loan interest up to Rs 200,000.
Additional exemptions include HRA and LTA benefits.