PPF vs NSC: Where will you get bumper returns on investment of ₹10 lakh? Understand the whole game of mathematics and tax of 5 years

Post office and government savings schemes have always been dominant among Indian investors looking for safe and guaranteed returns. When it comes to risk-free savings and tax benefits, Public Provident Fund (PPF) and National Savings Certificate (NSC) emerge as the most preferred options. Often investors are confused about which scheme will provide maximum profits and tax benefits over a period of 5 years if they want to invest a lump sum amount like Rs 10 lakh. Let us delve deeper into the rules, interest rates and tax mathematics of both the schemes in simple language.

Basic features and current interest rates of PPF and NSC

Public Provident Fund (PPF) is a long-term investment scheme backed by the central government, with a maturity period of 15 years. Currently, compound interest is being given on PPF at the rate of 7.1% per annum. The biggest condition of PPF is that only a maximum of ₹ 1.5 lakh can be deposited in it during a financial year.

On the other hand, National Savings Certificate (NSC) is a savings scheme with a fixed lock-in period of 5 years. It currently offers compound interest at the rate of 7.7% per annum. The biggest feature of NSC is that there is no upper limit on maximum investment in it, due to which investors can invest a huge amount like Rs 10 lakh at a time.

Rule of investment of ₹ 10 lakh: Can money be deposited in both together?

If you have a lump sum capital of Rs 10 lakh, you can invest it completely in NSC on day one. Under the rules of PPF, you can invest only a maximum of ₹ 1.5 lakh in a year.

If an investor deposits Rs 1.5 lakh in PPF every year continuously for 5 years, his total investment in 5 years will be ₹7.5 lakh (the remaining ₹2.5 lakh will not be deposited in the PPF account). Whereas in NSC, the entire Rs 10 lakh will be compounded at the rate of 7.7% for 5 years from the first day.

Full return calculation of 5 years investment

Let us understand the exact mathematics of returns and interest earned in both the schemes:

In NSC the entire capital comes together with the benefit of compounding, earning a total net interest of over ₹4.49 lakh in 5 years. Due to the investment limit in PPF, the total fund in 5 years is around ₹ 9.22 lakh.

Mathematics of tax exemption and liability: Where will the real savings lie?

It is most important to understand the returns on investment as well as the taxes applicable on it.

• ‘EEE’ status of PPF: PPF comes under the completely exempted-exempt-exempt (EEE) category. This means that the amount deposited gets a deduction of up to ₹ 1.5 lakh under Section 80C of the Income Tax Act, the interest earned on it is completely tax-free, and there is no tax on the maturity amount.

• Tax rules on NSC: On investing in NSC, tax exemption up to a maximum of ₹ 1.5 lakh is available under Section 80C in the first year. No 80C exemption will be available on the remaining ₹8.5 lakh. Additionally, the NSC interest adds to the investor’s total income every year and is taxable as per his tax slab (although the accumulated interest for the first 4 years can be claimed as re-investment within the 80C limit of Rs 1.5 lakh).

Which scheme is most suitable for which investor?

If your primary goal is to make a safe investment of ₹10 lakh lump sum for exactly 5 years and you want a higher interest rate, then NSC The most practical and better option.

Whereas if you have a long term vision of 15 years, want to save money in installments every year and are looking for 100% tax-free returns, then ppf There is no better safe option than this. Investors in higher tax brackets often prefer PPF because of its tax-free interest income.