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With stock market investments taking a beating, people are going back to fixed deposits and small savings schemes. Also, with March 31, 2009 fast approaching, investing for the sake of tax saving must be the number one priority for people right now.
Those who are looking for investment avenues that are inherently risk-free and give a guaranteed return can look at investing in either the National Savings Certificate VIII (NSC VIII) or the Public Provident Fund (PPF). Investments into NSC VIII will give an interest of 8% per annum. But, as the interest is compounded half-yearly, effectively NSC VIII will give an interest of 8.16% per annum. PPF on the other hand also gives an interest of 8% per annum but the interest is compounded annually. The rate of interest in case of NSC VIII is locked in at the time of investment unlike the case of the public provident fund (PPF) where interest rates can and have been changed and are applicable even on the corpus that has been built over the years. What is common to both the schemes is the fact that interest accumulates and is not paid out every year.
The minimum investment that can be made in case of NSC VIII is Rs 100. There is no upper limit. Certificates are available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. The investment tenure is six years. On the other hand, in case of PPF, the minimum investment that can be made is Rs 500 and a maximum contribution that can be made is Rs 70,000 per annum. The PPF account matures 15 years after the end of the financial year in which the investor first invests and requires an investment of a minimum of Rs 500 every year to keep the account active. The NSC VIII requires a one time investment whereas in case of PPF investments have to be regularly made over a period.
The NSC VIII matures in six years time and withdrawals from the PPF account are permitted six years after the year in which the account is opened. So, for those investors, who are looking to park their money for a medium term, NSC is a better bet than PPF.
Under Section 80 'C' of the Income Tax Act, individuals can make an aggregate deduction of up to Rs 1,00,000 from their gross income for certain kinds of investments. NSC is one investment avenue for which deductions are allowed. Even though, there is no upper limit for investments into NSC, only investments up to Rs 1,00,000 are tax deductible because that's the limit under Section 80 'C'. Since, the maximum investment allowed into PPF in a given year is Rs 70,000 only, the maximum deduction that can be taken for tax purposes is limited to that amount.
The interest on the investment into NSC, except in the sixth year, is not paid but credited to the investor's account. So, the interest that accumulates is treated as invested in NSC. Hence, the accumulated interest also qualifies for an exemption under Section 80 'C' for the first five years.
In the last year, the interest is handed over to the investor and hence does not qualify for a deduction. In case of PPF, the interest that accumulates is tax free through out the period till the maturity of the account.
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