PPF or NSC: What saves you more tax and makes you richer

The Public Provident Fund and National Savings Certificate are the most popular tax-saving investments.

But which one scores better when it comes to saving more tax or getting better returns?

Here goes....

1. Tenure is fixed, but varies for each instrument

Both the PPF and the NSC have fixed tenures.

On the point of liquidity, NSC scores 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 you can take a loan on your PPF account.

After the third financial year, excluding the year of the deposit, an investor is allowed to take a loan on her/his investment.

If you would prefer a partial withdrawal, that is permissible after the expiry of the 5th year from the date that the initial subscription is made.

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Return is guaranteed, but not the same

The return of both is fixed.

In the case of PPF, you are promised a return every year, though the exact figure fluctuates annually. From 12 per cent per annum, it got lowered to the 8 per cent range.

The returns are reset every financial year and are benchmarked against the 10-year government bond yield.

In 2012-13, the rate as fixed by the RBI was 8.8 per cent per annum. It then got upped to 8.7 per cent per annum and stays there this fiscal.

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.

Currently the rate is 8.5 per cent (NSC VIII) and 8.8 per cent (NSC IX) per annum.

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Return is compounded, but at different frequencies

The return in both cases is compounded and handed over on maturity.

In the case of PPF, it is compounded annually, but half-yearly where NSC is concerned. At first blush, the return from NSC is more enticing. But is that the case?

Let's say that you invest Rs 1 lakh in a 10-year investment earning 8.8 per cent per annum. If compounded annually, you would end up with Rs 2,36,597.

But if compounded half yearly you would earn around Rs 4,000 less (Rs 2,32,428).

However this difference does not hold strong simply because of the tax factor.

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The tax impact

Both instruments qualify for a deduction under Section 80C of the Income Tax Act.

The maximum limit under this section is Rs 1 lakh. You can invest up to that limit in either of the two instruments or both, or any other instrument under Section 80C.

However, PPF scores because not only do you get a deduction when you invest under Section 80C, but even the interest earned is tax free.

Not so in the case of NSC where the interest is taxed. Since the interest accruing annually is deemed to be reinvested, it also qualifies for deduction under Section 80C (totaling Rs 1 lakh per fiscal year).

So as mentioned above, even though the return in NSC is compounded half yearly, the return is taxed which makes PPF a better option but with a longer lock-in.

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Mode of investment

The PPF is an ongoing account that has to be maintained for 15 years. You would need to invest at least Rs 500 every year to maintain the account.

In fact, you can invest up to 12 installments in one financial year as long as the totality of investment does not exceed Rs 1 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 lakh), the investments in NSC do not qualify for a tax deduction.