Skip to main content

Tax Planning - Which is the best fixed income investment option PPF VPF NSC or FD

Download Tax Saving Mutual Fund Application Forms

Invest In Tax Saving Mutual Funds Online

Buy Gold Mutual Funds

Leave a missed Call on

94 8300 8300

 
 

Tax planning - Which is the best fixed income investment option PPF VPF NSC or FD

 

We are already in the third month of this financial year. Unless you have already started your tax planning, now is a good time to start planning for tax saving investments for the year FY 2014 – 2015. Remember, the longer you wait for start your investment, the more you will lose out on returns. In this article, we will evaluate the post tax returns of some of the popular fixed income tax saving investment options. The fixed income investment options that qualify for deduction under Section 80C of Income Tax Act are as follows:-

  1. Voluntary Provident Fund (VPF)

 

  1. Public Provident Fund (PPF)

 

  1. National Savings Certificates (NSC)

 

  1. 5 year Post Office Time Deposits

 

  1. 5 year Tax Saving Bank Fixed Deposit

Please note that Employee Provident Fund (EPF) also qualifies for tax saving under Section 80C. Your employer deducts your contribution to your PF account from your monthly pay cheque (12% of your basic salary). The annual interest earned on your PF savings is 8.5%. Please note that, this will have to be shown as a deduction under Section 80C in your Income Tax Returns. Therefore the balance amount left after deducting your EPF contribution from Rs 1 lakh is what is available for your tax saving investments under Section 80C. Let us now discuss the other investment options available to you.

There are 3 important considerations when evaluating fixed income investment options under Section 80C.

  • Interest Rate

 

  • Tax treatment

 

  • Liquidity

Interest Rates

The interest rates offered by these instruments are fixed from time to time by the Government or the banks. The chart below shows the interest rates of these instruments.

We can see that Bank FDs, 10 year NSC and PPF offer higher interest rates, compared to other instruments. The interest rate of Post Office 5 year time deposit is the lowest at 8.4% (in fact, it was even lower in the prior financial year). At first glance to less discerning investors, the difference in interest rates may seem small. But for investors with a long time horizon, a 20 – 30 bps difference in interest rate on a compounded basis can add up to a not so insignificant amount. However, investors should not make investment decisions based on interest rates alone, because tax treatment makes a big difference to the final returns.

Tax Treatment

To fully evaluate the impact of taxes on these instruments, one must understand the tax treatment at three different stages of investment:-

  • At the time of making the investment

 

  • During the tenure of the investment

 

  • On maturity of the instrument

The table below shows the tax treatment at each stage for various investment options

 

We can see from the table above that, PPF and VPF are the most tax friendly investment options. Bank and Post Office Fixed deposits interests are taxable. Even NSC interest is taxable. However, the accrued interest in NSC is deemed to be reinvested for tax savings under Section 80C of the Income Tax Act, provided it is within the overall limit of Rs 1 lakh allowed under Section 80C, along with other tax saving investments. Therefore the investor can declare the accrued interest as "income from other sources" in the Income Tax Return, and at the same time claim an 80C deduction for the accrued interest. In effect, accrued interest income and reinvestment cancel out each other, making the investment tax exempt throughout the term of investment, except the year of maturity. In the year of maturity, the investor cannot claim an 80C deduction for the accrued interest, because the interest is re-invested but paid to the investor. For details on how you can save taxes in NSC, please refer to our article, Tax Savings: A deeper look at National Savings Certificate.

The chart below shows the annualized post tax return from these various investment options.

We can see from the chart above that PPF is the best post tax investment option for the investor. The returns from Bank and Post Office fixed deposits are lower due to the taxability of interest in these investment options. As long as the accrued interest is within the overall 80C limits, the returns from NSC are above 8%. However, if an investor makes a large NSC deposit every year, then along with other eligible 80C deductions like employee provident fund contribution, life insurance premiums etc there may not be enough room within the available 80C limit for the accrued interest to qualify for 80C deduction. It will then substantially reduce the post tax returns from NSC.

Liquidity

The other important investment consideration is liquidity. There is no general financial planning guidance on liquidity. It depends on the financial situation of the investor like, income, fixed expenditure, savings pattern, existing assets, liquidity of those assets etc. When you make an investment, you should make sure that you are comfortable with the liquidity of the investment that you are making. The table below shows the liquidity related considerations for these best investment options.

 

The table above shows that the liquidity of PPF and VPF is lower compared to other investment options. However, you can take loans from your PPF account from 3 years onwards, under special circumstances. In the case a Post Office time deposit, you can withdraw after 6 months, but if you withdraw before the expiry of one year from the date of deposit, simple interest will be applicable. For the others, if deposit is withdrawn after one year from the date of deposit, interest will be calculated 1% less than the rate specified for the period.

Conclusion

In this article we have seen that if the investor has a long time horizon and does not need liquidity from the investment before maturity, then PPF is the best investment option. VPF is also a good investment option for a long time horizon, but companies may have timelines beyond which VPF contribution will not be accepted. If you are interested in making a VPF contribution, then you should check with the payroll department of your employer, if you can still make VPF contributions. If you have a shorter time horizon for your investment, then you may find NSC to be a more suitable investment option. However, the post tax returns on NSC will depend on your other 80C deductions, as discussed above. You can consult with an expert financial planner and / or chartered accountant to discuss with best tax saving investment option is suitable for you. Time is of essence in tax saving investments. You should finalize your tax saving plan as soon as possible.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund

2.Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

L&T Growth

Invest in Mutual Funds Online Download Mutual Fund Application Forms   L&T Growth Fund (LTGF) is open-ended diversified equity fund that invests predominantly in large caps. LTGF follows the growth style of investing and has been in existence for over 10 years now.   Type of scheme Open-ended Category Diversified equity Sub-category Large Cap Style Growth Launch date September 17, 2001 Risk-Return proposition High risk-Average return   Investment Objective and Proposition The fund's primary investment objective is "generate long term capital appreciation income through investments in equity and equity related instruments; the secondary objective is to generate some current income and distribute dividend. However, there is no assurance that the investment objective of the scheme will be achieved." Following large cap ...
Read more

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...
Read more

Nomination in Investment

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Nomination in investment   As an investor, you spend most of your precious time in deciding on your investments, their tenure, and the returns that your invested money will fetch practically. Do you know who gets your investment money when you are "no more"? I am sure most of you must have come across the 'nominations' column, while filling any of your financial application form, be it that for a Mutual Fund, or a Demat Account, or simply a Bank Account. More often, people have a tendency to leave the nomination field blank, or fill the same uncertainly, without even understanding the big importance of this little detail. Here, let us try to put forth the significance of a nomination into our financial lives. What is nomination? A person to wh...
Read more

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...
Read more

Gold ETFs - Tracking Error

Invest in Mutual Funds Online Download Mutual Fund Application Forms At present, there are 13 gold ETFs and three gold funds of funds OVER the past few years, gold-backed exchange traded funds ( ETFs ) have emerged as preferred investment tools for people who want to take advantage of the price rise in the metal without the hassles of physically buying it and preserving it. Since 2007, when the first gold ETF-benchmark BeES was launched in the country, there has been a steady increase in the investments going into this paper gold. In the past four years, several fund houses launched their gold ETFs and some of them have even launched gold fund of funds, which invest in gold ETFs. At present, there are 13 gold ETFs and three gold fund of funds. Though all these funds have gold as the underlying asset and they closely track the price movement in the commodity, the net asset value (NAV) of a gold ETF does not exactly reflect the value of the physical gold and the return...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now