Navigating the world of investments with guaranteed returns can be a smart move, and two popular options in India are the Public Provident Fund (PPF) and the National Savings Certificate (NSC). Deciding between them requires a clear understanding of their features. This comprehensive comparison of NSC vs PPF will help you make an informed choice based on your financial goals and preferences.
Contribution Specifics
Understanding the contribution rules of national savings certificate vs those of PPF is crucial for effective financial planning.
Public Provident Fund (PPF):
- Minimum Annual Contribution:
₹500.
- Maximum Annual Contribution:
₹1.5 lakh per year.
- Flexibility:
You can contribute any amount between the minimum and maximum limits, in multiples of ₹50.
National Savings Certificate (NSC):
- Minimum Contribution:
₹100.
- No Upper Limit:
There is no cap on the maximum investment amount.
- Denominations:
NSCs are retailed in fixed denominations: ₹100, ₹500, ₹1,000, ₹5,000, and ₹10,000. So, to invest ₹30,000, you would have to purchase three certificates of ₹10,000 each.
Returns and Compounding
There is little difference between NSC and PPF when it comes to attractive interest rates. But their compounding frequency differs. This impacts your final returns.
Public Provident Fund (PPF):
- Interest Rate:
Currently 8.1% per annum.
- Compounding:
Interest is compounded annually.
National Savings Certificate (NSC):
- Interest Rate:
Currently 8.0% per annum.
- Compounding:
Interest is compounded half-yearly (twice a year), which can lead to slightly better returns over time due to more frequent compounding.
Tax Implications
The tax treatment of both investments, particularly regarding interest earned, is a significant differentiator. Both PPF and NSC investments qualify for income tax deduction under Section 80C of the Income Tax Act, up to a maximum of ₹1.5 lakh on the principal invested.**
Public Provident Fund (PPF):
- Interest Taxation:
The interest earned on PPF is entirely tax-exempt. This EEE (Exempt-Exempt-Exempt) status means your contributions, interest earned, and maturity amount are all tax-free.
National Savings Certificate (NSC):
- Interest Taxation:
Interest earned on NSC is taxable at your individual income tax slab rate.
- Reinvestment Benefit:
While the interest is taxable, the accrued interest on NSC is considered to be reinvested and therefore also qualifies for deduction under Section 80C.
- Annual Declaration:
It is generally recommended to declare the accrued interest on your NSC annually in your income tax returns. This approach spreads the tax liability over the five-year tenure of the NSC, preventing a large taxable sum from accumulating in the maturity year. If you fail to declare interest on an accrual basis, the entire interest earned (the difference between the maturity value and the deposited amount) will be treated as income in the year of maturity. While you can still claim it under Section 80C, it would be a substantial amount and taxable at the then-applicable tax rate, potentially pushing you into a higher tax bracket.
Investment Tenure
The difference between national savings certificate and PPF, when it comes to the maturity period, significantly impacts how long your funds are locked in and not available to you.
Public Provident Fund (PPF):
- Maturity Period:
15 years from the end of the financial year in which the account was opened. It is often perceived as a retirement plan by many investors.
- Extension Option:
You can extend the account in blocks of five years indefinitely, even after maturity. This is particularly useful if you opened an account young (e.g., at the age of 23) and don't need the funds in your late 30s when it matures. Extending allows you to continue earning interest at the prevailing rate, make new deposits, and enjoy tax benefits.
- Withdrawal:
You can withdraw the entire balance after 15 years from the closing of the financial year in which you opened the account. For instance, if opened in FY 2017-18, withdrawal is possible starting April 1, 2033.
National Savings Certificate (NSC):
- Maturity Period:
Significantly shorter at just 5 years from the date of investment. This makes it a more suitable option for those with shorter-term financial goals.
Permissible Number of Accounts
Rules regarding the number of accounts you can hold differ between the two.
Public Provident Fund (PPF):
- One Account Per Individual:
You can only maintain one PPF account in your own name.
- Minor Accounts:
You can open an additional PPF account in the name of a minor child, where you act as the guardian.
- Tax Benefit Cap:
Even if you have two accounts (one in your name and one for your child), the combined maximum tax benefit under Section 80C remains ₹1.5 lakh. For example, if you deposit ₹80,000 in your account, you can only deposit ₹70,000 in your child's account (your total tax benefit will still be limited to ₹1.5 lakh).**
National Savings Certificate (NSC):
Once you purchase a National Savings Certificate, you cannot add to that specific certificate. To make additional investments, you must purchase a new NSC. This means you can hold multiple NSC certificates.
Ownership Structure
The ability to share ownership or nominate beneficiaries also varies.
Public Provident Fund (PPF):
- Single Ownership:
A PPF account can only be owned by one individual.
- Nomination:
You can nominate someone to receive the funds upon your demise.
National Savings Certificate (NSC):
- Flexible Ownership:
You can hold an NSC singly (in your own name) or jointly with another person.
- Nomination:
Nomination facilities are also available.
Opening the Account
Accessibility plays a role in convenience.
Public Provident Fund (PPF):
- Banks:
You can open a PPF account at any branch of the State Bank of India, even if you don't have an existing account with them. Many other nationalized banks are also authorized to offer PPF accounts. It would be advisable to check with your preferred bank.
- Post Offices:
You can also open a PPF account at the head post office in your vicinity or at selection grade sub-post offices.
National Savings Certificate (NSC):
- Post Offices:
NSCs are primarily available for purchase at any post office across India, making them widely accessible.
By carefully considering the comparison above on multiple aspects, you can determine whether PPF or NSC (or a combination of both) aligns best with your investment plan objectives, risk tolerance, and tax planning strategies.
**Tax exemptions are as per applicable tax laws from time to time.
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