It’s soon going to be tax time. So how should you be spending your time? Well….Doing tax planning of course.
In the words of Lord Bramwell:
“Like mothers, taxes are often misunderstood, but seldom forgotten."
Now, there are a number of financial products, which give you tax benefits. Which one should you choose? Let’s limit this discussion to just two financial products: National Saving certificate, popularly called NSC. Public Provident Fund, popularly called PPF. Better still….let’s understand the difference between NSC and the PPF. Want to learn more on investing? Just leave a missed call on IndianMoney.com financial education helpline 02261816111 or just post a request on IndianMoney.com website. IndianMoney.com offers genuine, unbiased, free on-call financial advice to ensure that you make wise financial decisions.
National Savings certificate popularly called NSC, is a very safe investment. Your money is safe. You also earn interest, on the money you invest in the NSC. You can invest in the NSC, at the nearest post office. The minimum investment in NSC, is just INR 100. There is no upper limit on the money, you invest in the NSC. You get a tax benefit only up to INR 1.5 Lakhs a year, on the money you invest in the NSC. The NSC has a maturity term of 5 years. You earn an interest of 8% per annum, compounded half yearly.
Just like the NSC, your investment in the PPF, is very safe. You earn interest on your investment in the PPF. You can open a PPF, with a yearly investment of INR 500. You can invest a maximum amount of INR 1.5 Lakhs a year, in the PPF. The PPF has a maturity term of 15 years. You can even avail a loan against PPF. The interest rate on the PPF, from October 1st 2016 to December 31st 2016, is 8% compounded annually.
Both NSC and PPF, have fixed tenures. The NSC V111 issue, has a tenure of 5 years. PPF has a tenure of 15 years. When it comes to liquidity….there’s a clear winner. NSC V111 issue has a maturity tenure of just 5 years, compared to the maturity tenure of PPF. Your money invested in PPF, has a lock in of 15 years. Guess you would want your money fast.
You invest in a financial product, depending on your investment goals. An investment goal is simple….What’s it that you want from your investment and what’s the time you are willing to stay invested, called investment horizon. You could have a medium term horizon (say around 5 years), or even a long term horizon (say around 15 years), for your investments. Your son is in 8th standard and wants to be a doctor. You want to finance his education. NSC is an excellent investment, as you have a medium term horizon (you need the money in 5 years). If you are a conservative investor (you don’t like much risk in your investments), then there is no better investment for retirement, than the PPF. The long term horizon of 15 years, forces you to stay invested till retirement.
The money you invest in both PPF and NSC, gives tax deductions up to INR 1.5 Lakhs on your taxable income, under Section 80C. However PPF enjoys “EEE” benefits. The money accumulated and withdrawn at maturity, are tax free. The interest you earn on the NSC is taxed. However this interest is not paid to you. It is reinvested in the NSC and qualifies for fresh deductions, under Section 80C. The real difference is at the end. The interest you get from the NSC in the final year, does not get any tax benefit. It is paid to you, along with the interest of the earlier years and the capital amount (initial sum you have invested).
Today, the Government is busy cutting interest rates offered on small saving schemes. A few years ago, PPF offered interest rates of 12% a year. Today it’s much less. Still PPF remains an excellent investment for retirement planning. The NSC is not far behind, except in tax benefits. It remains an excellent investment to attain medium term goals. So adopt the horses for courses policy. Select an investment which best suits your needs.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.