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January 7, 2013

Both are backed by the government and give assured rates of interest. What really is the difference between the two?

Author : iFAST Content


People often get confused between the Public Provident Fund (PPF) and the National Savings Certificate (NSC). Here is a comparison between the two popular tax-saving investments.

Maximum Limit
The minimum one can invest in PPF in a financial year is Rs 500 and the maximum is Rs 1 lakh. There is no limit under NSC. One can buy however many certificates they choose to. But for the tax benefit, the limit will stick to Rs 1 lakh.

Mode of investment
Deposits into the PPF account can be made in 12 installments in a financial year. The minimum deposit has to be Rs 500. Investments in NSC are lumpsum since one has to buy a certificate. The certificates are available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 or Rs 10,000. So if you want to invest Rs 30,000, you will have to buy 3 certificates of Rs 10,000 each. You can buy these certificates over the year but you pay in lumpsum for the specific denomination. So if you buy a certificate of Rs 10,000, you pay that amount then and there.

Rate of interest
The rate of interest currently for a 5-year NSC certificate is 8.60% and it goes up marginally to 8.90% for a 10-year certificate. This rate is fixed for the entire tenure. The rate of interest in a PPF account changes every financial year starting on April 1. Currently it stands at 8.80%.
However, a crucial differentiating factor is that the rate of interest in the NSC is compounded half yearly while that of PPF is compounded annually. But this one-up in the case of NSC gets nullified by the tax impact.

Tax impact
Both these investments fall under Section 80C. That means the investments made under this section are eligible for an income deduction up to a maximum Rs 1 lakh.
In the case of PPF, even the interest earned is tax free. Not so in the case of NSC where all interest income is taxable at the respective slab rate of the individual.

Tenure of investment
In the case of NSC, the certificate can be held for 5 or 10 years. After that it has to be encashed.
PPF accounts have to be held for 15 years. So, if you opened it in FY 2006-07, you will be able to withdraw it 15 years later, starting March 31, 2007 (end of that financial year). That is April 1, 2022. So in totality, it goes up to 16 years. Once the 15-year tenure has been completed, the account holder can extend it by a 5-year block.

Though NSC has a much shorter tenure, the PPF does have some options in case the individual is in dire need of cash. A loan facility is available from the third financial year up to the fifth financial year. Withdrawals are permitted from the sixth financial year onwards.

Since both instruments are backed by the government, safety is not an issue with either of them.

To read more about PPF click here:


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