Are you looking for safety, returns, and tax savings when you invest? Do you have a time-bound financial goal for which you need a safe investment option? If your answer to both these questions is yes, then there are two savings schemes, which are guaranteed by the government, that will serve your purpose. These schemes will provide the safety of capital, as well as guaranteed interest payments over the tenure of the scheme.
The schemes which have these features are the Public Provident Fund and National Savings Certificate. If you are interested in knowing more about them, read on.
Here are the main highlights of this scheme.
This is a small-savings scheme supported by the government. Like the PPF scheme, this is equally safe.
Here are the main highlights of this scheme.
Both the Public Provident Fund scheme and the National Savings Certificate require a low investment to start and annual investment in maintaining it. They are easily available at either your post office or bank and can be used for claiming tax deductions.
Let us compare the features of the two schemes to help you decide which is the right option for you.
| Features | PPF | NSC |
|---|---|---|
| Minimum Contribution | Rs. 500 | Rs. 100 |
| Maximum Contribution | Rs. 1.5 lacs | No upper limit |
| Denominations | Not applicable | Not applicable |
| Interest Rate | 7.9% | 7.9% |
| Compounding | Yearly. | yearly |
| Tax Benefits | Under Section 80 C of the Income Tax Act. Maximum benefits Rs. 1.5 lakhs. Interest is tax-free. | Under Section 80 C of the Income Tax Act. Maximum benefits Rs. 1.5 lakhs. Interest is taxable at the income-tax slab that you fall under. You can claim the the interest as a deduction under 80C. It is advisable to declare the annual interest in the year in which it arises, or else you will have to declare the interest for the entire 5 years on maturity. |
| Tenure | 15 years which can be extended in blocks of 5 years each. You will continue to receive the rate of interest applicable for the period as well as tax benefits. | 5 years and this cannot be extended. You need to redeem the maturity amount, which would include the accumulated interest and invest in a fresh NSC. |
| Additional Investments | Can be made to the existing account. | Cannot be made to the existing investment, a new investment can be made. |
| Minor Account | Yes, you can have a separate account in the name of a minor. However, total tax benefits will be limited to Rs. 1.5 lakhs. | You can invest in the name of a minor with regard to an NSC certificate. |
| Ownership | Only a single holding is permissible. Nomination facility is available. | Joint holding is possible. You can also be the sole holder and nominate someone. |
| Loan Facility | You can take a loan against your PPF account between the 3rd and 6th financial year. | You can pledge your NSC and take a loan against it from a bank. |
When it comes to interest rates being offered by PPF or NSC, they are both offering an interest rate of 7.9% per year. However, you need to understand how the interest is calculated and the tax benefits you are entitled to under both schemes.
The interest rate offered by PPF is linked to the Government security yield and is revised every quarter in a financial year according to the changes in the G-sec yield.
At present, the rate is 7.9%, and it is compounded on a yearly basis. The interest is completely tax-free.
Let us illustrate the calculation of the annual interest in a PPF Account with an example.
If you invested Rs. 1.5 lakhs in a PPF Account on 1st April 2019, being the maximum amount being eligible for deductions under Section 80C, then your balance at the end of the financial year or March 2020 including interest would be Rs. 161850.
In year 2, your opening balance on 1st April 2020 would be Rs. 161,850 and assuming the interest rate staying the same at 7.9%, the balance at the end of the next financial year or 31st March 2021 would be 1,61,850 X 7.9% or Rs. 174636.
However, you need to keep in mind that you should invest before the 5th of every month as the interest is calculated between the minimum balance between the 5th and the end of each month.
When it comes to calculation of interest under the NSC scheme, the interest rate is fixed for the entire 5-year tenure of the scheme. So, if you invest today at 7.9%, you will be paid on maturity, the principal and interest at this rate. Now if you invest INR 1,00,000/- grows to INR 1,46,250 after 5 years.
However, as the interest payable on NSC is taxable, it is advisable to include Rs. 10,472 in your taxable income for the given financial year. Otherwise, when your NSC matures, you will have to include interest for all the five years, and this will mean a higher tax outgo in that year.
When it comes to tax benefits, investments made in PPF, as well as NSC, are eligible for deduction up to Rs. 1,50,000 under Section 80 C of the Income Tax Act.
As far as the interest is concerned, PPF interest is tax-free, whereas, NSC interest is taxable and will be added to your taxable income. However, the interest in NSC is also eligible for deduction under Section 80C of the Income Tax Act.
It is better to pay tax on the accrued interest annually rather than on maturity.
Both PPF and NSC are excellent investment options given the safety of principal and assured returns in this day and age of volatility. The best way to optimize your returns is to plan how to invest in both these schemes, dividing investments between the two for tax benefits, and achieving your financial goals.
If you are interested in a long-term financial goal, use PPF which can be extended beyond 15 years in blocks of 5 years. If you open an account for your minor child, they can either withdraw the proceeds or continue the account for as long as they like. With tax benefits, stable returns and loan facilities, use either one scheme or both, and fulfill your financial goals!
Is NSC better than PPF?
Though NSC and PPF are both eligible for deductions under Section 80 C of the Income Tax Act, they are different in terms of end objectives.
With a shorter lock-in period of 5 years and a fixed rate of interest, NSC can be used to fund short-term goals like a foreign trip or down payment for your car.
For longer-term goals like higher education of your child or marriage, you can use PPF which has a 15-year lock-in period, avail loan facilities and can be extended in blocks of 5 years. Besides, it comes under the exempt-exempt-exempt category where the contribution, the interest, and the maturity value are tax-free.
Can I open both NSC and PPF?
Yes, you can open both NSC and PPF simultaneously. You can use NSC to pay for your short-term financial goals and use PPF to realize your long-term financial goals (more than ten years).
However, you need to keep in mind that the deductions under Section 80 C have an upper limit of Rs. 1.5 lakhs. You could divide the investments between the two schemes.
You will also be eligible for loans from both these schemes. For PPF, loans can be availed off between the 3rd and the 6th financial year. This will help you overcome a temporary fund crisis.
Which is better NSC or PPF?
As discussed earlier, both NSC and PPF serve different purposes because of their tenure and flexibility. While NSC is of a shorter duration, there is no flexibility of extension. Hence, if you want to invest for a 5-year period and need the safety of principal and interest, go for NSC.
On the other hand, even though PPF has a longer lock-in period, you or your children can extend it beyond 15 years and use it for a longer goal like retirement. It has greater tax benefits compared to NSC and would be more beneficial for those in the higher tax bracket.
