PF, PPF, Fixed Deposits, National Pensions Scheme and National Savings Certificates

Tax planning is not easy. You may be earning a lot but if you are not able to save enough, neither will you get money in times of need nor can you save on the taxes that you have to pay to the government. Deciding to invest in a particular savings scheme is also tough. One has to take care of several aspects like the returns it will give, lock-in period of investment and more.

“The major objectives from savings schemes are principal protection, meeting long-term financial goals and the tax benefits that they provide,” said Tarun Birani, Founder and CEO of TBNG Capital Advisors. Here, we bring to you five key savings schemes and the benefits that they can make you earn:

1. Employee Provident Fund

Provident fund is a fund for salaried employees. It is a compulsory retirement savings scheme for public as well as private sector employees. The Employees’ Provident Fund Organisation under the Ministry of Labour and Employment oversees this fund.

Interest rate:
The interest rate on EPF is decided by the EPFO board every year based on the weighted average return generated by the fund. For fiscal 2016-17, it paid an interest of 8.65 per cent.

Tax benefits:
The amount that you contribute for your EPF will qualify for tax deduction under Section 80C of the Income Tax Act, subject to a maximum of Rs 1.50 lakh. The interest you earn on your EPF savings every year and the final maturity amount is also exempt from tax.

2. Public Provident Fund

Public Provident Fund (PPF) offers safety with attractive interest rates and returns that are fully exempted from tax. The minimum deposit in a PPF account in a financial year is Rs 500 and maximum is Rs 1.5 lakh.

Interest Rate:
Interest rate on PPF and other small savings scheme are reset every quarter. Investors in PPF currently get an interest rate of 7.8 per cent.

Tax benefits:
PPF enjoys EEE or exempt, exempt, exempt status – contribution, interest and maturity proceeds all are tax free.

3. Fixed Deposits

Fixed deposits are one of the most popular savings product available in the country due to their flexibility and liquidity. Fixed deposits, also known as term deposits, offer fixed rate of interest for the entire tenure of deposit.

Interest rate:
Rates of interest vary from bank to bank. For example, State Bank of India revised its FD rates with effect from July 1, 2017 for retail domestic term deposits (fixed deposits below Rs 1 crore). SBI now offers 6.75 per cent interest on one-year fixed deposits compared to 6.9 per cent earlier. But this was for usual FDs which do not give tax-saving benefits.

Tax benefits:
Interest income earned from bank fixed deposits is fully taxable, unlike savings bank account where one gets income tax exemption on interest earned up to Rs. 10,000 a year. In case of bank fixed deposits, banks deduct tax at source (TDS) at the rate of 10 per cent if the interest income for the year is more than Rs. 10,000. TDS is calculated by checking the combined interest income of all branches of a particular bank.

Some banks also offer tax saving fixed deposits. The amount that you invest in these FDs qualify for income tax exemption under section 80C. However, the interest that you earn from a tax-saving FD will be taxable.

4 National Pension Scheme

The National Pension System (NPS) was launched on 1st January, 2004 with the objective of providing retirement income to all the citizens. NPS aims to institute pension reforms and to inculcate a habit of saving for retirement amongst the citizens, states the NPS website (See more details on NPS here:

“NPS although partially taxable does not provide the same tax benefit as EPF. However, considering that it provides greater choice over asset allocation, potential for return enhancement and the additional tax deduction of Rs 50,000 over and above the Rs 1.5 lakh that it offers, individual taxpayers, specifically the younger generation,  should consider allocating more funds towards it,” said Mr Birani.

Interest rate:
In case of NPS, returns are market-linked. “In our view, the potential of returns in a market-related investment like NPS is higher than of a guaranteed return instrument like PPF/PF. This is due to two reasons, one is the choice of equity exposure in NPS and secondly the component of professional fund management,” Manoj Nagpal, CEO of Outlook Asia Capital, told NDTV Profit.

Tax benefits:
Investments of up to Rs 2 lakhs (Rs 1.5 lakh under section 80C and an additional Rs 50,000 under section 80CCD) is eligible for tax deduction under NPS

5. National Savings Certificates

This savings scheme is offered by the government of India, and is sold in all post offices. Amount invested in this scheme qualifies for tax deduction under section 80C. 

Interest rate:
The rate of interest currently being offered on NSC is 7.9 per cent, according to India Post website.​ The maturity value of a certificate of Rs 100/- purchased on or after 1.10.2016 shall be Rs 146.93 after five years.

Tax benefits:
There is no maximum investment limit in NSC and also TDS is not deducted on interest amount. However, interests earned on NSC is taxable.

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