Tax Saving Fixed Deposit vs. PPF Account

Tax Saving Fixed Deposit vs. PPF Account

Tax Saving Fixed Deposit is one of the recent additions to the category of Fixed Interest earning Investment and is allowed to be claimed as deduction under Section 80C. The Interest Rate to be paid on these Tax Saving Fixed Deposit is decided by the Bank with whom the Investment has been made and most banks are paying Interest in the range of 8.5%-9%, whereas the PPF Interest Rates are benchmarked against the 10-year Government Bond Yield and is 0.25% higher than the average Govt. Bond Yield. PPF Interest Rates are announced every year by the RBI in the month of March for the upcoming Financial Year. The PPF Interest Rate as announced by RBI for the year 2013-14 is 8.7%. Both Public Provident Fund and Tax Saving Fixed Deposits are allowed as deduction under Section 80C up to a maximum limit of Rs. 1,00,000 p.a.

The maturity of Tax Saving FD is 5 years as compared to maturity of Public Provident Fund which is 15 years. But the interest earned on Tax Saving Fixed Deposit is taxable as compared to interest earned on PPF Account which is tax free.

Particulars	Tax Saving Fixed Deposit	Public Provident Fund
Maturity	5 years	15 years
Minimum Investment	Rs. 100	Rs. 500
Maximum Investment	Rs. 1,00,000	Rs. 1,00,000
Deduction available u/s 80C	Rs, 1,00,000	Rs. 1,00,000
Interest Rate	Fixed by the Bank	Fixed by the Govt
Tax on Interest earned	As per Income Tax Slab Rate	Exempt
Premature Withdrawal Facility	Not Allowed Maturity after 5 years	Available from 5th year onwards but only to a certain extent
Loan Facility	Not Allowed Maturity after 5 years	Can be availed from 3rd year onwards

National Savings Certificate (NSC) vs. PPF Account

The National Savings Certificate is issued in denominations of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000, Rs. 10,000. A person can purchase any no. of certificates of any denomination. Whereas the maximum amount that can be deposited in a PPF Account every year is Rs. 1,00,000 and the Minimum amount to be invested every year is Rs. 500. Both Public Provident Fund and National Savings Certificate (NSC) are schemes wherein deposits are made in the Post Office/specified banks but are backed and maintained by the govt. However, the major difference between these two is that National Savings Certificate is a one time deposit scheme whereas in Public Provident Fund you have to invest a minimum specified amount (i.e. Rs. 500) every year so as to keep the account active.

The Maturity period of National Savings Certificate is also lower i.e. 5/10 year as compared to the maturity of the Public Provident Fund which is 15 years.

Particulars	National Savings Certificate	Public Provident Fund
Maturity	5 / 10 years	15 years
Minimum Investment	Rs. 100	Rs. 500
Maximum Investment	No maximum limit	Rs. 1,00,000
Deduction available u/s 80C	Rs, 1,00,000	Rs. 1,00,000
Interest Rate	Fixed by the Bank	Fixed by the Govt
Tax on Interest earned	As per Income Tax Slab Rate	Exempt
Premature Withdrawal Facility	Not Allowed Maturity after 5 years	Available from 5th year onwards but only to a certain extent
Loan Facility	Not Allowed Maturity after 5 years	Can be availed from 3rd year onwards

Conclusion: When a person wants to invest for a lesser term of 5 or 10 years he can go for Tax Saving FD scheme or National Savings Certificate. But please note that these schemes do not allow premature withdrawal or loan facility, both of which are available in PPF. While if one is looking for a true tax free income then investing in PPF makes much more sense as the interest is completely tax free, while the interest on Tax Saving FD is charged as per slab rate and interest on National Savings Certificate is eligible for deduction under 80C. Moreover PPF cannot be attached via a court order in case of insolvency or bankruptcy.

So in our opinion, investment in PPF is a much better proposal. And if one wants to invest more than Rs. 1,00,000 then he may invest the excess amount in NSC.