Investment avenues of the small savings variety have conventionally been the 'bread and butter' options for a significant portion of the investing community, thanks to their attractive returns coupled with high safety levels.
Furthermore if tax planning is high on investors' agenda, small savings instruments emerge as a natural choice yet again.
In this article we have profiled options from the small savings segment available to investors and recommended an investment strategy for the same.
Broadly speaking, most small savings schemes offer tax benefits in some form. However, for this study we have considered only instruments offering tax benefits at the time of making investments.
In other words, we have only considered post-office schemes offering tax rebate under Section 88. As a result schemes like Post Office Monthly Income Scheme and Post Office Time Deposits, which offer benefits on interest under Section 80L have been given the miss.
Two schemes fulfill the above criteria, the Public Provident Fund and National Savings Certificate.
1. Public Provident Fund
The PPF ranks as one of the most attractive schemes within the gamut of small savings. It presently offers a return of 8 per cent p.a. and runs over a 15-year period.
The scheme promotes regular savings by ensuring that contributions are made every year to keep the account active; these contributions can vary from Rs 500 to Rs 70,000 p.a.
Liquidity
PPF doesn't score too well on this parameter. Withdrawals are permitted only after the expiry of six years from the end of the financial year in which the first deposit was made.
Also the amount which can be withdrawn is a factor of the balance present under the PPF account during earlier years.
Tax benefits
Investors are entitled to claim tax-benefits under Section 88 for deposits made up to Rs 70,000 p.a. in the PPF account. Also the interest is exempt from tax under Section 10 of the Income Tax Act.
2. National Savings Certificate
NSC is another attractive instrument offering a return of 8% pa. Investors are required to make a single deposit and the interest component is returned along with the principal amount on maturity. NSC has an edge over PPF on account of a relatively lower tenure, i.e. 6 years.
Liquidity
Like the PPF, NSC also scores rather poorly on this parameter. Premature encasement is only permitted under specific circumstances such as death of the holder(s), forfeiture by the pledge or under court's order.
Tax benefits
Investments in NSC enjoy tax-benefits under Section 88 of the Income Tax Act. The interest is entitled for exemption under section 80L of the Income Tax Act.
An added incentive is that the accrued interest is automatically reinvested, and qualifies for benefit under Section 88.
Investment strategy
|
|
PPF |
NSC |
|
Interest rate |
8.00% |
8.00% |
|
Interest receipt |
On maturity |
On maturity |
|
Tenure |
15 years |
6 years |
|
Tax benefit on investing |
Rebate under Sec. 88 Sec. |
Rebate under Sec. 88 Sec. |
|
Tax benefit on income generated |
Fully exempt under Sec. 10 |
Deduction under Sec. 80L |
|
Min. investment amt (Rs) |
500 pa |
100 |
|
Max. investment amt (Rs)* |
70,000 pa |
70,000 pa |
A judicious mix of the two can prove to be a high utility proposition for investors. PPF is an ongoing investment scheme wherein deposits are made regularly over the 15-year tenure. Investors who have age on their side should allocate a larger portion of their 'tax-saving' kitty towards the PPF, while a smaller portion should be assigned for NSC.
The alternate sources of income will enable investors to counter poor liquidity associated with PPF and yet build up a (tax free!) significant corpus over a period of time.
Also investors whose PPF accounts are close to maturity (say those with 2-3 years left) can consider investing a major part of their invisible surplus. On maturity these proceeds would not only have earn attractive returns but will also be tax-free.
Another factor which investors could benefit from is that interest rates on PPF are reset periodically. While this could work against investors in a falling rate scenario, investors are also positioned to benefit in a situation (as witnessed presently) when rates are on the ascent.
With passage of time, investors should reduce their allocations to PPF accounts and hike the ones in NSC unless of course they 'need' to invest for a 15-year tenure.
Investments in NSC provide a fixed return throughout their tenure, irrespective of changing circumstances. When your risk-appetite is on the decline, any form of uncertainty is unwelcome; NSC with an assured return is the place to be.
Investors can draw on their PPF accounts (which would have accumulated a healthy corpus over the years) to meet liquidity needs.This article forms a part of the latest issue of Money Simplified - The Definitive Guide to Tax Panning. Click here to download, for FREE, the complete guide.