Small-saving schemes such as PPF and NSC are the best options today, given their attractive interest rates.
It may not be tax-saving season yet but you should start your investments to avoid choosing sub-optimal options at the end.
While the employee’s provident fund will act as your compulsory saving if you are a salaried individual, the National Savings Certificate (NSC) and Public Provident Fund (PPF), besides the five-year tax-saving deposits remain your options in the fixed income category. Of these, NSC and PPF offer attractive interest rates this year.
Unit linked insurance plans, new pension scheme and tax-saving mutual funds are options in the non-fixed income space. But if your investment is linked to tax savings, you might not want to run the risk of losing capital to save tax. Hence, you should lock into safe options first and then explore the rest for long-term goals.
IDEAL CHOICE
Currently, the small savings scheme, NSC, offers the best rates in terms of returns, taking in to account the tax benefits you will enjoy. If you are in the 30 per cent tax bracket, then this is the top-returning instrument in the debt category. From April 2012, small savings schemes earn higher interest rates.
The five-year NSC will offer 8.6 per cent for investments in the current fiscal – that is for investments made up to March 2013. This rate will remain fixed throughout the tenure even if the government announces new rates for subsequent years. So what makes this option attractive? One, the principal amount is allowed as deduction under Section 80C of the Income Tax Act but within the overall limit of Rs 1 lakh. Two, the interest, which is compounded half yearly, is treated as reinvested until the penultimate year. The interest earned on the last one year alone will be taxed. These two factors together will offer you an attractive 16.5 per cent yield annually on your investments, if you are in the 30 per cent tax slab.
There is also a new series of NSC which has a maturity of 10 years, with a slightly higher interest rate of 8.9 per cent. The yield on this though, will be lower at 13 per cent, given the longer tenure. The five-year NSC also scores over five-year tax-saving fixed deposits offered by banks as most of them offer a pre-tax rate of 8.5 per cent currently.
STRATEGY FOR NSC
These certificates are ideal options if you are working towards specific goals, irrespective of your tax-saving need. Each NSC certificate will also state the maturity amount you will get. For instance, Rs 1 lakh invested now will fetch you Rs 1.52 lakh after five years. Net of tax (assuming 30 per cent) for the final year’s interest income, you will receive about Rs 1.5 lakh. There is no limit on the investment you can make in a year, although tax benefits are restricted.
You need not wait for your first lot of NSCs to mature to invest again. In fact you can build a steady lump sum cash flow plan by investing in NSCs every year.
PPF FOR LONG TERM
A PPF account can be opened in post offices, the State Bank of India and its associates and select private banks such as ICICI Bank for a term of 15 years. It can be continued for five additional years. For the current year, PPF interest rate stands at 8.8 per cent.
The interest income from PPF is tax free but the rate itself is subject to change every year. Hence, you cannot be sure of the final sum you will receive from saving in PPF. Nevertheless, the rates cannot be lower than long-term government bond rates.
Its tax-free interest income status makes this option attractive. Just to put it in perspective, even if PPF rates are at 7 per cent, a fixed deposit will have to deliver a pre-tax return of 10 per cent (for those in the 30 per cent tax bracket) to equal the returns of PPF. This, together with the tax deduction up to Rs 1 lakh, makes PPF an ideal option for long-term savers.
That said, there are a few limitations with PPF. One, you can only invest Rs 1 lakh a year, whether you claim tax benefits or not.
Two, you can withdraw a part of your savings only from the seventh year. But you can borrow one year after the end of the financial year in which you started and up to five years from the investment year.
STRATEGY FOR PPF
PPF remains the best fixed income option to invest small sums regularly.
You can deposit money every month;a maximum of 12 instalments in a year is allowed.
You can also go for online investment options available with banks such as ICICI, where you can go for direct debit facilities, if you hold your bank account there.
This way you can create your own SIP to invest in PPF every month.
While you are not allowed to hold more than one account in your name, you can additionally invest in your minor child’s name by opening another PPF account.
While interest rates vary every year, you can ensure that you earn the maximum by timing your investments well. If you are making a lump sum deposit, invest it in the beginning of a financial year. If you are making monthly investments, ensure that you invest before the fifth of every month.
Your interest is calculated on the minimum balance between the fifth and the end of a month.
If you are not a salary-earning individual, the NSC and PPF remain your best tax-saving option, in the absence of the Employee Provident Fund.
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