By Larissa Fernand (edited by Varun Sharma)*
To start off with, let’s look at the investment
trinity. There are three guidelines on which you must evaluate every single
investment: risk, return, liquidity.
In the case of PPF and NSC, both are backed by
the government and so score high on the risk parameter. You can be pretty sure
of getting your money back.
On the liquidity front, there is a fair amount of
disparity. Agreed, both have fixed tenures. But the NSC does show up in a more
favourable light simply because of the lower lock-in period. The NSC VIII issue
is for 5 years and the NSC IX issue is for 10 years.
PPF is much longer at 15 years and can even be
extended by a block of 5 years on maturity. But worth noting is that after the
third financial year, excluding the year of the deposit, an investor is allowed
to take a loan on his investment. Partial withdrawals are permissible after the
expiry of the sixth year from the date that the initial subscription is made.
They continue to diverge on the return front too.
Of course, they both offer fixed returns which are set at the start of the
financial year but the similarity ends there. The current rate for PPF, as
fixed by the RBI, is 8.7% per annum. Currently the rate for NSC is fixed at
8.5% (NSC VIII) and 8.8% (NSC IX) per annum.
In the case of NSC, the rate of return is locked
at the time of investment and during the tenure of the investment it remains
insulated from any changes in rates. That is because once you buy a NSC, you
cannot continue to add to that particular investment certificate. If you want
to increase your exposure, you will have to buy another. In the case of PPF, it
is an account and you can keep adding to it.
The return in both cases is compounded and handed
over on maturity. An apparent distinction is that the return is compounded
annually in the case of PPF, but half-yearly where NSC is concerned. Once
again, it puts NSC in a good light but the tax benefit nullifies the effect.
Both instruments qualify for a deduction under
Section 80C of the Income Tax Act. The maximum limit under this section is Rs
1.50 lakh. You can choose to invest up to that limit in either of the two
instruments or both. (Or any other instrument under Section 80C).
PPF offers you a deduction all the way and is
known as EEE – implying exempt-exempt-exempt. What this means is that you get a
deduction when you invest under Section 80C, the interest earned every year is
exempt from tax, and the entire amount at maturity (principal + interest
earned) is also exempt from tax.
Not so in the case of NSC where the interest is
taxed. So as mentioned above, even though the return in NSC is compounded half
yearly, the return is taxed which makes PPF a better tax-saving option but with
a longer lock-in.
So how does one choose between the two?
If you already have a PPF account, you would know
that you have to invest at least Rs 500 every year to maintain the account. In
fact, you can invest up to 12 instalments in one financial year as long as the
totality of investment does not exceed Rs 1.50 lakh.
The NSC is a one-time investment. The investment
can start from as low as Rs 100 and there is no maximum limit. However, once
you touch the limit under Section 80C (Rs 1.50 lakh), the investments in NSC do
not qualify for a tax deduction.
So if you have an ongoing PPF account, it would be better to keep investing in it since it also offers great tax benefits. However, if you forsee an expense exactly 5 years down the road, then you could consider an NSC with that very tenure.
* Source: http://www.morningstar.in/posts/30251/should-you-invest-in-ppf-or-nsc.aspx
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