Under Section 80C, Tax Planning & Investments - Which is the Best Investment Option?
I googled for this information today, every where every one suggests to go with PPF (15 Yrs Term), NSC Bonds (6 Yrs Term), Tax Saving
FDs (5 Yrs Term), Investment in Equity linked Saving Scheme (ELSS) (3 Yrs Term), LIC Policies
Apart from 1 Lakh Savings (Under 80C), Rs.20,000 can be saved in to Infrastructure Bonds (Section 80CCF)
PPF vs NSC:
While PPF offers 8% per annum (p.a.), NSC offers 8% per annum compounded half yearly i.e., the effective yield is 8.16% per annum. Not a big difference.
Here goes more information about PPF & NSC (PPF vs NSC - How to Decide?)
Among all the tax-saving instruments under section (u/s) 80C, ELSS occupies the numero uno position (for details, please read “ELSS: The Best Section 80C Option”) but the ELSS schemes are inherently risky. So, if you’re not comfortable investing in ELSS, you can consider PPF (Public Provident Fund) or NSC (National Saving Certificate). Among the assured return schemes, both PPF and NSC occupy the top slot.
But, the next question is: How to decide which – PPF or NSC – is better among the two? Or, which is the best tax-saving instrument under section 80C among the assured return schemes? Therefore, this article attempts to resolve the classic dilemma: NSCs vs. PPF. Let’s compare them on various parameters:
PPF vs. NSC – A Comparison
1. Returns
While PPF offers 8% per annum (p.a.), NSC offers 8% per annum compounded half yearly i.e., the effective yield is 8.16% per annum. Not a big difference.
2. Tax on returns
PPF returns are tax-exempt but NSC returns are taxable. Interest accrued on NSC is to be included in your total income every year.
However, you’re also entitled to get the deduction under section 80C for the interest accrued on NSCs, because this notional interest is deemed to be reinvested. So, the net effect is that your section 80C limit gets reduced to that extent because otherwise you would have made investment in other tax-saving instruments to the extent of accrued interest on the NSC. If your section 80C limit already stands exhausted, then your post-tax returns from NSC would become 6.48% if you fall in 20.6 per cent tax bracket and 5.64% if your marginal tax rate is 30.9 percent.
3. Whether returns are guaranteed/ fixed
Once you invest in a NSC the interest rate gets locked-in i.e., can’t be changed subsequently, where as in case of PPF the returns are assured but not fixed. In other words, depending upon the interest rate scenario, government can move it either downward or upward, as the economic situation demands.
However, as the interest to your PPF account gets credited every year, the change in interest rate is always prospective and not retrospective.
Let’s see the past changes in the PPF interest rates:
From 1986-87 to 1999-00 -> 12.00%
2000-01 -> 11.00%
2001-02 -> 9.50%
2002-03 -> 9.00%
Since 2003-04 -> 8.00%
Now, let’s see the past changes in NSC interest rates:
Mar’01 to Feb’02 -> 9.5%
Mar’02 to Feb’03 -> 9.0%
Mar’03 onwards -> 8.0%
From the above mentioned changes in PPF and NSC interest rates, we notice that PPF and NSC interest rates are changed simultaneously, so that both are at par (with a slight difference due to half yearly compounding in case of NSCs).
However, what makes the yield differ is the fact that in case of NSC’s revised rates applies only for new purchases, while for PPF new interest rates apply to all accounts, both new and existing. For instance, let’s say you invested Rs 1000 each in both PPF and NSC in March 2001. Now, while for NSC you would have received interest @ 9.5% per annum (compounded half-yearly) for all the 6 years of it’s duration, your PPF account would be credited with interest @ 9.5% for only the year 2001-02 and for subsequent years reduced interest rate would apply (i.e., 9% for 02-03 and 8% since 03-04 onwards).
4. Liquidity
While the duration of NSC is 6 year, PPF carries a lock-in period of 15 years. Besides, PPF premature account closure is not permissible except in case of death. Although partial withdrawals are allowed from the PPF account from seventh year onwards, the actual amount depends on the balance in the account in earlier years. Thus, NSCs offer better liquidity than PPF.
5. One time or regular investment
While NSC requires one time investment, PPF requires regular investment. NSC is the form of a certificate but PPF is in the form of an account and to keep it active, you’ve to make regular investment – a minimum amount of Rs 500 has to be deposited every year to keep the account active.
So, except the parameter of ‘taxability of returns’, on all other counts the NSCs score over PPF. However, this singular factor is big enough to tilt the balance in favour of PPF. Let’s see:
1. If the tax-saving limit of Rs 1 lakh under section 80C remains under-utilized year after year, then NSC, no-doubt, is the best option for you because in that case net tax effect (of NSCs accrued interest) is zero. In other words, in such a case, NSCs returns also become tax-free.
2. If your existing tax saving investments exceeds the limit of Rs 1 lakh (or expected to cross the Rs one lakh mark, in the near future) as specified under section 80C, then it would have direct impact on your post-tax returns from NSCs ; for example, it becomes 5.64% if you fall in the 30.9% tax bracket. In such a case it is better to opt for PPF. However, even in such a case you should opt for NSC if your investment horizon is medium term (i.e., you’re going to require the money, say, after 6 or 7 years for your spending needs).
No doubt, the liquidity factor and uncertainty associated with the PPF interest rate are two major drawbacks.
However, if you just change your perception and give it another look, lack of liquidity should not be a hindrance. Perhaps, it’s a blessing in disguise. Why? Because even if you get back your money, say, after 3 years or 6 years, won’t you invest it some where else or spend it on some worthless things.
So, if you invest your funds for different time duration according to your financial plan/ needs and invest only so much in PPF which you can spare for long term, 15 years lock-in period should not be a constraint. In other words, for the purpose of saving money for long term goals, like education and marriage of children or to save for retirement – which you must – PPF is the best debt instrument after EPF (Employees Provident Fund).
Besides, in emergency cases, if you require the funds before the maturity, the option of making partial withdrawals, or borrowing against your PPF account, is always available.
As regards the uncertainty associated with the PPF interest rate, we can observe that since 2003, there has not been any change in the PPF interest rates. Even if there is a change in near future, in my view, it can’t go beyond +/- 1%.
FDs (5 Yrs Term), Investment in Equity linked Saving Scheme (ELSS) (3 Yrs Term), LIC Policies
Apart from 1 Lakh Savings (Under 80C), Rs.20,000 can be saved in to Infrastructure Bonds (Section 80CCF)
PPF vs NSC:
While PPF offers 8% per annum (p.a.), NSC offers 8% per annum compounded half yearly i.e., the effective yield is 8.16% per annum. Not a big difference.
Here goes more information about PPF & NSC (PPF vs NSC - How to Decide?)
Among all the tax-saving instruments under section (u/s) 80C, ELSS occupies the numero uno position (for details, please read “ELSS: The Best Section 80C Option”) but the ELSS schemes are inherently risky. So, if you’re not comfortable investing in ELSS, you can consider PPF (Public Provident Fund) or NSC (National Saving Certificate). Among the assured return schemes, both PPF and NSC occupy the top slot.
But, the next question is: How to decide which – PPF or NSC – is better among the two? Or, which is the best tax-saving instrument under section 80C among the assured return schemes? Therefore, this article attempts to resolve the classic dilemma: NSCs vs. PPF. Let’s compare them on various parameters:
PPF vs. NSC – A Comparison
1. Returns
While PPF offers 8% per annum (p.a.), NSC offers 8% per annum compounded half yearly i.e., the effective yield is 8.16% per annum. Not a big difference.
2. Tax on returns
PPF returns are tax-exempt but NSC returns are taxable. Interest accrued on NSC is to be included in your total income every year.
However, you’re also entitled to get the deduction under section 80C for the interest accrued on NSCs, because this notional interest is deemed to be reinvested. So, the net effect is that your section 80C limit gets reduced to that extent because otherwise you would have made investment in other tax-saving instruments to the extent of accrued interest on the NSC. If your section 80C limit already stands exhausted, then your post-tax returns from NSC would become 6.48% if you fall in 20.6 per cent tax bracket and 5.64% if your marginal tax rate is 30.9 percent.
3. Whether returns are guaranteed/ fixed
Once you invest in a NSC the interest rate gets locked-in i.e., can’t be changed subsequently, where as in case of PPF the returns are assured but not fixed. In other words, depending upon the interest rate scenario, government can move it either downward or upward, as the economic situation demands.
However, as the interest to your PPF account gets credited every year, the change in interest rate is always prospective and not retrospective.
Let’s see the past changes in the PPF interest rates:
From 1986-87 to 1999-00 -> 12.00%
2000-01 -> 11.00%
2001-02 -> 9.50%
2002-03 -> 9.00%
Since 2003-04 -> 8.00%
Now, let’s see the past changes in NSC interest rates:
Mar’01 to Feb’02 -> 9.5%
Mar’02 to Feb’03 -> 9.0%
Mar’03 onwards -> 8.0%
From the above mentioned changes in PPF and NSC interest rates, we notice that PPF and NSC interest rates are changed simultaneously, so that both are at par (with a slight difference due to half yearly compounding in case of NSCs).
However, what makes the yield differ is the fact that in case of NSC’s revised rates applies only for new purchases, while for PPF new interest rates apply to all accounts, both new and existing. For instance, let’s say you invested Rs 1000 each in both PPF and NSC in March 2001. Now, while for NSC you would have received interest @ 9.5% per annum (compounded half-yearly) for all the 6 years of it’s duration, your PPF account would be credited with interest @ 9.5% for only the year 2001-02 and for subsequent years reduced interest rate would apply (i.e., 9% for 02-03 and 8% since 03-04 onwards).
4. Liquidity
While the duration of NSC is 6 year, PPF carries a lock-in period of 15 years. Besides, PPF premature account closure is not permissible except in case of death. Although partial withdrawals are allowed from the PPF account from seventh year onwards, the actual amount depends on the balance in the account in earlier years. Thus, NSCs offer better liquidity than PPF.
5. One time or regular investment
While NSC requires one time investment, PPF requires regular investment. NSC is the form of a certificate but PPF is in the form of an account and to keep it active, you’ve to make regular investment – a minimum amount of Rs 500 has to be deposited every year to keep the account active.
So, except the parameter of ‘taxability of returns’, on all other counts the NSCs score over PPF. However, this singular factor is big enough to tilt the balance in favour of PPF. Let’s see:
1. If the tax-saving limit of Rs 1 lakh under section 80C remains under-utilized year after year, then NSC, no-doubt, is the best option for you because in that case net tax effect (of NSCs accrued interest) is zero. In other words, in such a case, NSCs returns also become tax-free.
2. If your existing tax saving investments exceeds the limit of Rs 1 lakh (or expected to cross the Rs one lakh mark, in the near future) as specified under section 80C, then it would have direct impact on your post-tax returns from NSCs ; for example, it becomes 5.64% if you fall in the 30.9% tax bracket. In such a case it is better to opt for PPF. However, even in such a case you should opt for NSC if your investment horizon is medium term (i.e., you’re going to require the money, say, after 6 or 7 years for your spending needs).
No doubt, the liquidity factor and uncertainty associated with the PPF interest rate are two major drawbacks.
However, if you just change your perception and give it another look, lack of liquidity should not be a hindrance. Perhaps, it’s a blessing in disguise. Why? Because even if you get back your money, say, after 3 years or 6 years, won’t you invest it some where else or spend it on some worthless things.
So, if you invest your funds for different time duration according to your financial plan/ needs and invest only so much in PPF which you can spare for long term, 15 years lock-in period should not be a constraint. In other words, for the purpose of saving money for long term goals, like education and marriage of children or to save for retirement – which you must – PPF is the best debt instrument after EPF (Employees Provident Fund).
Besides, in emergency cases, if you require the funds before the maturity, the option of making partial withdrawals, or borrowing against your PPF account, is always available.
As regards the uncertainty associated with the PPF interest rate, we can observe that since 2003, there has not been any change in the PPF interest rates. Even if there is a change in near future, in my view, it can’t go beyond +/- 1%.
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