W hen we carried an earlier piece on PF vs PPF: What's the difference? . we were flooded with mails telling us to do a piece on PPF vs NSC.
This is what we attempt to do here. Explain the difference between the Public Provident Fund and the National Savings Certificate.
The NSC is a post-office savings scheme while the PPF was established by the central government in 1968. But both are very safe since they are backed by the government.
How much goes in?
The minimum amount you have to put into your PPF account in a year is Rs 500. The maximum you can put is Rs 70,000 per year.
With NSC, the minimum amount is Rs 100. Here, is no upper limit on investment.
However, NSC is sold in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. So, if you want to invest Rs 30,000, you will have to buy three certificates of Rs 10,000 each.
What do I get?
On the face of it, both give an identical rate of interest: 8% per annum. Or so it seems.
The only difference is in the way it is computed. PPF is compounded annually. NSC is compounded half-yearly (twice a year).
Let's say on April 1, 2006, you invested Rs 30,000 in PPF and the same amount in NSC.
On April 1, 2007, your PPF account will have Rs 32,400 while your NSC will have Rs 32,448.
What's the tax impact?
The most important issue!
Both these investments fall under Section 80C. That means the investments made under this section are eligible for an income deduction upto a maximum Rs 1,00,000.
This is as far as your principal investment goes.
Let's look at the interest earned.
With PPF, you pay no tax on the interest you earn.
What about NSC?
Till FY 2004-'05, an individual could avail of a deduction under Section 80L of the Income Tax Act. This limit was Rs 12,000 of interest income received during the financial year.
This deduction has been done away with from FY 2005-'06. Now, all interest income is taxable at the respective slab rate of the individual.
The interest accrued on NSC is taxable. But, it is also eligible for a deduction under Section 80C.
Generally, it is advisable to declare accrued interest on NSC on a yearly basis. So, over the period of six years, you could declare the interest income for each year. In such a case, it does not amount to a huge sum.
If you do not declare the interest on accrual basis, then the entire interest earned (difference between the amount deposited and the maturity value) would accumulate in the year of maturity. You could then claim it under Section 80C but it would be a huge amount and would be taxable at the current applicable tax rate.
How long do I hold it?
PPF is for 15 years, but you can extend it for a block of five years. Let's say you open a PPF account when you are 21 years old. It matures when you are in your late 30s, when you may be earning well and may not need the money. In that case, you can continue with the account.
Of course, you do have the option of withdrawing the entire balance on maturity, that is, after 15 years of the close of the financial year in which you opened the account.
So, if you opened it in FY 2006-07 (this financial year), you will be able to withdraw it 15 years later, starting March 31, 2007 (end of this financial year). That is April 1, 2022.
If you extend it for five years after that, you continue to earn the rate of interest and can also make fresh deposits and get the tax benefit.
NSC is for a much shorter duration -- just six years from the date of investment.
How many can I have?
Once you open an NSC, you can't keep adding to it. You will have to buy another. Let's say you buy a NSC of Rs 30,000. In a year's time, you want to add another Rs 30,000. You cannot add it to this amount. You will have to buy another NSC.
With PPF, you can have just one account. But this does not matter because you have to make annual additions. Every year, you keep adding to it.
However, if you like the safety of the investment and a guaranteed return of 8% per annum, you can open one in your child's name.
So you can have one account for yourself and one for your child. But this does not mean the tax benefit is doubled. The limit is the same -- Rs 70,000, irrespective if it all goes in your account or in your account and your child's.
Let's say you open an account for your minor child. You can deposit Rs 70,000 in your account and Rs 70,000 in your child's account. But you will only get the tax benefit on Rs 70,000.
How is it held?
The PPF account cannot be held jointly. You can nominate someone but it cannot be jointly held with someone else.
With NSC, you can hold it jointly or you can hold it singly and nominate someone.
Where can I open it?
To open a PPF account, you can drop by a State Bank of India branch. No, you do not have to have an account with them.
You can also ask your nationalised bank where you have an account if they are authorised to open PPF accounts. You can also approach the head post office in your area. If that is inconvenient, ask your local post office (selection grade sub post offices are allowed to do so).
To buy an NSC, just approach any post office.