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Still a good bet

Larissa Fernand

The downward interest rate revision of the ubiquitous Public Provident Fund (PPF) has been met with much disappointment. After all, most individuals first planted money in this scheme before considering any other investment. After the revision, the question uppermost in every investor's mind is: Should one still consider investing in PPF? The answer remains yes. Let me explain.

The tax benefits are impeccable. Interest earned on the PPF amount is totally exempted from tax under Section 10 of the Income Tax Act. Moreover, the amount invested in PPF is entitled for a tax rebate under Section 88 of the Income Tax Act. That means 20 per cent of the amount invested will be deducted from the total tax you pay.

Then comes the interest rate factor. The 1 per cent drop (from 12 per cent to 11 per cent) does not mean that this investment should not be considered. The tax-adjusted yield of the 11 per cent PPF works out to 16.42 per cent if you take the taxpayer in the highest bracket of 33 per cent. That still makes it a very attractive investment.

So, if you are considering an alternate to PPF, the competing instrument should at least be offering an annual return of 16.42 per cent. Revision or not, the return is still far superior to what you would get on any debt instrument taking the safety factor into account.

A bank deposit should fetch you a return in the range of 5 per cent to 11.5 per cent, depending on the tenure opted for. The return offered by Non Banking Finance Companies (NBFC) are hovering between 10 per cent to 15 per cent, though how safe some of them are is a matter of debate.

The only instrument that comes close in comparison in returns and safety to the PPF is the National Savings Certificate (NSC) which also offers 11 per cent. While the NSC investment qualifies under Section 88, it does not get the Section 10 benefit but section 80L benefit. That means interest earned is clubbed together with interest from other instruments and is exempted from tax up to Rs 13,000.

There are other differences too between the PPF and the NSC. While in both cases you get a lumpsum on maturity, the NSC is a one-time payment unlike the PPF where you have to put in at least Rs 100 every year. The PPF acts more as a forced and consistent savings tool. What's more the NSC is only for 6 years, unlike a PPF account which is a long-term investment with a 15 year time frame.

	Return	Tenure	Tax Benefit	Tax Benefit
	(% pa)		on Investment	on Interest
PPF	11	15 Years	Tax Rebate	Non taxable
NSC	11	6 Years	Tax Rebate	Section 80L
NBFC Deposit	10-15	1-5 Years	Nil	Nil
Bank Deposit	5-11.5	15 days- 5 Years	Nil	Section 80L
Debt Mutual Fund	10-12	Not Applicable	Nil	Yes
AAA Debt	12-13	3 - 5 Years	Nil	Section 80L for Govt Bonds
				Nil for Corporate Debt

Related article:

The safest way to retire

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