NSC vs PPF: Which One is Better for You
Traditionally in India, conservative options are trusted more when it comes to investing their hard-earned money. This habit is evident in the amount of gold we hold and our interest in investing in conventional options like fixed deposits. A study by the Securities and Exchanges Board of India (SEBI) says that less than 10% of Indians own equities, further underlining the fact.
If you are looking for an investment option that is conservative and, at the same time, gives good returns, then Public Provident Fund (PPF) and National Savings Certificate (NSC) are two options worth considering. Both options come with the lowest level of risk while offering decent returns.
What is the NSC Scheme?
National Savings Certificate (NSC) is a fixed-income instrument offered by the government of India through post offices. The plan aims to encourage people in India to save more. By choosing the post office as the medium, the government has tried to ensure that the scheme has a broader reach.
You can start investing in an NSC with a minimum deposit of Rs 1,000, with no upper limit on investment.
The maturity period of your NSC investment is five years. Currently, there is no option to extend the tenure. But you can always start a new investment after five years to continue earning interest at the prevailing rate. You can also invest in more than one NCSs at the same time.
NSC is a fixed-interest scheme which means you will continue to enjoy the same benefits until maturity. Currently, the interest rate on NSC is 7.7%, compounded annually. It means that the profits your investment accrues are reinvested into the corpus so that the compounded corpus starts earning interest.
The NSC scheme also offers a number of tax benefits. Both the interest accrued and the capital invested are exempted (up to Rs. 1.5 lakhs) under section 80C of the Income Tax Act, 1961. However, the maturity amount is taxable as per your tax-slab.
NSC scheme is exclusive only to the residents of India. You cannot start a new NSC investment scheme as an NRI.
Benefits of NSC
- NSC offers guaranteed returns at almost zero risk to investors over five years.
- The interest is compounded over five years. Compounding means the interest you earn is reinvested, and the compounded corpus starts accruing interest after that.
- NSC can be used as collateral for loans. If you need money urgently, you may avail a loan against NSC; however, the loan amount will depend on your investment.
- Most post offices in India provide NSC. Hence, opening an NSC account is easy. All you need to do is contact your nearest post office with the required KYC documents.
- You can also invest in NSC on behalf of a minor.
- You can claim tax exemption up to Rs 1.5 lakh for your investment in NSC under Section 80C of the Income Tax act, 1961.
What is PPF Scheme?
The Public Provident Fund (PPF) is another government-backed investment scheme launched by the National Savings Institute in 1968. The objective of PPF is to encourage people to build a retirement corpus that helps secure their financial future after retirement.
Since PPF is not a market-linked scheme, the returns are fixed. Moreover, as it is a government-backed scheme, you can expect guaranteed returns on your PPF investment.
PPF has a lock-in period of 15 years which is more than the lock-in period of NSC. Once the PPF reaches its maturity, you have the option to extend it in blocks of five years.
The minimum investment required to open a PPF account is Rs 500, and the maximum investment limit is Rs 1.5 lakh per year. You can only open one PPF account as per the PPF rules, 2019.
PPF rate of interest is fixed by the finance ministry. The ministry announces the interest rate every quarter. The current PPF interest rate is 7.1%.
The interest payout happens on 31st March every year and gets credited to your account directly.
PPF comes under Section 80C of the Income Tax Act. Hence, you can claim tax benefits of up to Rs1.5 lakh per year for your investments in the scheme.
Furthermore, PPF falls under the EEE tax-exempt category, meaning that your annual contribution, accumulated interest and maturity amount are all tax-free.
Benefits of PPF
- PPF is not a market-linked scheme. Your investment earns interest based on the rates announced by the government. This makes PPF a very low-risk option, offering guaranteed returns.
- You can start investing in PPF with a minimum amount as low as Rs 500. Moreover, PPF even allows you to invest in multiples of Rs 50 innumerable times per financial year.
- Even though the lock-in period is 15 years, you can avail loans against PPF after the third financial year till the end of the sixth financial year of the PPF tenure. After that, you can opt for a PPF advance or partial withdrawal under certain circumstances.
- PPF also comes with multiple tax benefits. It falls in the exempt-exempt-exempt category of investments, which means that the invested amount (up to Rs. 1.5 lakhs), the interest earned and the maturity amount are all tax-free.
NSC vs PPF
Now if you are wondering – NSC or PPF, which is better? – the below comparison may help.
|Maturity period||5 years, non-extendable||15 years, and extendable in blocks of five years.|
|Minimum initial investment||Rs. 1,000||Rs. 500|
|Maximum investment amount||No upper limit||Rs. 1.5 lakh|
|Rate of interest||7.7%||7.1%|
|Number of accounts allowed||Not limited||One account per individual|
|Loan against account||Allowed||Only allowed after the third financial year and until the end of the sixth financial year|
|Premature withdrawal||Not allowed||Allowed after six years of investment|
|Tax benefits||Investment up to Rs 1.5 lakh is tax deductible. Interest earnings are taxable.||Investment up to Rs 1.5 lakh is tax deductible.Interest earnings and corpus built are tax-exempt.|
NSC and PPF are excellent investment options if you are a risk-averse investor. Both offer safety for your principal amount and provide assured returns. However, you must choose between the two after thoroughly understanding the differences and seeing which one works the best for your financial goals.
Planning how to invest in these schemes is one of the best ways to optimise returns. For long-term goals like retirement planning, PPF can be an excellent choice. NSC, on the other hand, can help you achieve various short-term goals. Therefore, both can enable you to meet investment objectives. Ultimately, it all depends on your goals and preferences.
Is NSC a good investment option?
There are several reasons why NSC can be a good investment choice for you. To begin with, it is a risk-free investment option. There is no market linkage, and the returns are generated at a fixed rate of interest rate. It comes with a tenure of five years, so if you are a conservative investor looking to meet short-term goals, NSC can be an excellent choice.
NSC vs PPF, which is better?
Both NSC and PPF are popular investment options. The main difference between them is the lock-in period. NSC has a maturity period of five years, but it comes with a slightly lower interest rate. At the same time, PPF has a higher interest rate and a longer lock-in period of 15 years. You may choose according to your investment goals.
Can I buy NSC for ten years?
NSC is an investment option that has a lock-in period of five years. There is no option to renew or extend your NSC investment. If you want to invest for more than five years, you can buy another NSC after five years, or you can also buy more than one NSC basis your need and investment goal.
When is the interest income credited to the PPF account?
The PPF interest is calculated monthly on the lowest balance between the fifth and last day of the month. Although the interest is calculated monthly, the interest payout happens yearly, on the last day of the financial year. This means that the interest income will be credited to your account on 31st March.