Friday, 13 April 2012

NSC vs PPF - Lets Compare

David Castillo Dominici
When it comes to tax saving products, you have variety of options. You have products like ELSS, ULIP that are associated with market risk. On the other hand you have Products like PPF, NSC, Bank Fixed Deposits that promise assured returns.
PPF and NSC have always enjoyed Top Slot when it comes to Tax Saving Products with assured returns.
Now the next task would be to pick the best out of these two. A detailed comparison should help us in making the right choice:
Here we go:
A quick look at the comparison chart, one can infer that biggest attraction for NSC is Liquidity and Small Lock-in Period, however one should be not ignore the fact that returns of NSC are taxable. Post Tax returns for person in highest tax bracket would be as little as 6%.  PPF would give you tax free returns of 8.8%.

NSC ( 5 Years)- Lock-in
NSC( 10 Years) Lock-in
Tax on Maturity
Tax Free
One Time Investment
Half Yearly
Half Yearly
Lock in Period
15 Years
5 Years
10 Years
Extend After Lock-in
Yes in block of 5 years
Guaranteed Returns
Interest Rates can change
Fixed Interest Rate
Fixed Interest Rate

If you have investment horizon of 15 years, it is better to park your money in PPF.
Let us dive deep and look for details:
PPF: 8.8% Returns. Annual Compounding. 
NSC: 8.6% for 5 years Lock-in and 8.9% for 10 years Lock-in. half yearly compounding.Conclusion: From a quick look it may appear that NSC is better off with half yearly compounding. In reality the post tax returns will be quite less in case of NSC due the returns being taxable. Considering this, PPF will have an edge over NSC.
PPF: Has a lock- in period of 15 years.NSC: Come with two options, 5 years Lock-in and 10 years Lock-in.Conclusion: It is clear the NSC has better advantage as it has smaller lock-in period. However it is interesting to note that in case of PPF, you have an option to avail Loan (3rd to 6th year) and partial withdrawal (from 7th year onwards).
Tax on Maturity:
PPF: No Tax on Maturity.NSC: Returns are Taxable.Conclusion: PPF is clear winner here. Returns of NSC are taxable. NSC would yield post tax returns of 6% for people in highest tax bracket.
One Time Investment:
PPF: You need to invest at least 500 Rs per year to keep your account active. NSC: One time actvity.
Extend After Lock-in:
PPF: 15 years is the lock-in period for PPF. After this, you can extend it block of 5 years.NSC: Not applicable.Conclusion: Again PPF is the winner here. You have flexibility to extend it after lock-in period. 
Guaranteed Returns :
PPF: Interest rates in case of PPF are not fixed. They are assured but not fixed. Government can either increase of decrease the interest rates.NSC: The interest rate is same throughout. The interest rate applicable on the day of purchase is fixed though out the tenure.
Final Take Away:
Investment in PPF would yield better returns in comparison to NSC. The only drawback in case of PPF is the lock-in Period. Unless you don’t need money after 5 years, it makes sense to park your money in PPF.
What is your preference and why?


Anonymous said...

thanks for the information

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