Update: Government is planning to allow a quarterly reset of interest rates on PPFs and NSCs. If this gets implemented, the rate-difference between PPF, NSCs and Fixed deposits will shrink.
This article is part of our series on helping consumers understand the common investment/savings instruments available outside of stock markets. The series consists of :
Before we head out to discuss PPF Vs FD Vs NSC and help choose between Public Provident Fund, Fixed Deposits and National Savings, lets spend some time to get a clear understanding of all these three investment options available to Indian Residents – NSC, PPF and FDs.
Why a comparison between PPF, Fixed Desposits and NSC is needed?
Most middle class tax payers, look at options that can help them earn money and also probably save a bit on the income tax front. Public Provident Funds have been promoted by the central government and hence have signifcant awareness amongst Indians. Fixed Deposits also have been around as a safe investment instrument, promoted by the banking industry. Given that the fixed deposit rates keep on varying, their attractiveness keeps on changing.
Public Provident Fund (PPF)
Public Provident Fund (PPF) is held by the government and is usually secure with relatively high returns. The minimum investment limit in PPF is Rs. 500 and the maximum is up to Rs.1,00,000per annum. At the present time PPF is compounded at a yearly interest of 8.7%. The scheme is for 15 years.
Benefits of Public Provident Fund (PPF):
- The depositor receives the rebate on his asset under section 80C of I.T. Act 1961.
- Interest earned on PPF and the absolute sum is measured as tax free.
- If you want to invest small amount of money then you can do it every year for a long period.
- Balance total held in PPF account is also tax free from wealth tax.
Interested in PPFs? learn more about PPF a/cs and how to open a PPF Account. (you can now have an online PPF account also)
In a fixed deposit saving scheme, an exact sum of money is invested in the bank for an assured phase of time by assigning a fixed rate of Interest. The minimum limit of investment in most of the banks is Rs. 100. Currently, the interest rate in most of the banks is between 8%-10%.
Benefits of Fixed Deposits:
- The saving in fixed deposit schemes is tax free under section 80L but only till a limit of Rs. 12,000.
- The deposited amount will be safe as it is indemnified under the Deposit Insurance & Credit Guarantee Scheme of India.
- The depositor can avail for loans up to 75%-95% of the invested sum.
- Fixed deposits are greatest choice to go for if you want to spend your money for an extensive phase of time in addition to being paid a high returns.
National Savings Certificate (NSC)
National Saving Certificate (NSC) is a post office savings scheme. Similar to PPF, NSC is also held by the government and is one of the best available safe investment options. One important thing of NSC is that there is no maximum limit on investment; though, the minimum limit of investment is Rs. 500.
The rate of interest on deposited sum is compounded on 8.6% for 5 years lock-in period and 8.9% for 10 years lock-in period twice a year.
Benefits of National Savings Certificate (NSC):
- The depositor receives tax exemption on initial 5 years under section 80C of Income Tax Act.
- You can also apply to avail loans from banks over this certificate.
PPF Vs FD Vs NSC:
||5 & 10 Years
||8.6% & 8.9%
||8 to 10%
|Tax on Maturity
|Premature withdrawal facility
||Yes, from 5th year Onwards
Final Take Away:
To invest in PPF would give way enhanced returns in comparison to NSC & FD. The single disadvantage of PPF is the lock-in Period and i.e. 15 years. If you don’t need your money before 5 years then certainly PPF is the best choice among these 3 available saving plans in India.