We all work hard every day to earn money, right? No matter what your source of income is, minimising our tax outgo is a task we all wish to do. After all, letting our hard-earned money get reduced by taxes is something no one wants to see, right?
That is exactly why tax saving?is important.?
And, given the massive popularity of bank fixed deposits and public provident fund (PPF) among Indian investors, particularly risk-averse ones, deciding between the two can be a difficult task.Choosing between the two also becomes a dilemma because both are among the safest investment options and offer similar tax savings benefits under Section 80C of the Income Tax Act.
So if you too are a risk-averse investor who is confused or curious to know which of these two tax-saving options to choose, fret not. Read on as we compare PPF and tax-saving bank fixed deposits to help you make the right decision.
Also Read:?How Much?Tax?You Pay For Your?Investments
Bank Fixed Deposits, including the five-year tax-saving FDs, are covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI, for an?amount of Rs 5 lakh per bank and per depositor.?
This holds true for covering both interest and principal in the event of bank failure. This insurance cover extends also to other forms of bank deposits, such as savings, current, and recurring. In case you hold deposit accounts in more than one bank, the Rs. 5 lakh cover would apply separately to each bank, provided the bank is included in the RBI¡¯s list of scheduled banks.
On the other hand, PPF is managed by the Government of India, with both the principal and the interest components coming with a sovereign-backed guarantee.?
Bank FD interest rates widely across public and private sector banks, with 5-year tax saver FD's rate currently hovering in the range of around 6.5%-7.5% p.a.?
Remember that FD rates remain fixed till its maturity tenure, irrespective of the changes in the FD¡¯s card rate during that period.?
Whereas for PPF, the interest rates are set on the basis of government bond yields. Currently, the PPF interest rate is 7.1% p.a.
It's also worth noting that contrary to popular perception, the interest rates of PPF do not remain fixed throughout the entire tenure. The Finance Ministry reviews PPF interest rates along with other small saving schemes on a quarterly basis.
A big advantage that PPF holds over many other tax saving instruments, is that it falls into the EEE (exempt, exempt, exempt) category.?So, the amount invested in PPF, the interest earned on PPF and the maturity proceeds of PPF, all three are tax-free.
For bank FD investors, tax liability does not end with a TDS deduction. Interest income from FDs, even in the case of five-year tax saving FDs, is included in your annual income and then taxed in accordance with your income tax slab.?
When compared to tax saver bank FD, the biggest disadvantage of PPF is its long lock-in period of 15 years.?
However, for some degree of liquidity, PPF does allow the facilities of partial withdrawals, loans and premature closure, subject to certain applicable conditions regarding the year in which it can be withdrawn, the reason, and the amount that can be withdrawn.?
As far as tax-saver bank FDs are concerned, they have a lock-in period of 5 years, and most banks usually do not allow you to even take a loan against tax saver FD.?
There is no clear yes or no here because every investment option has its own set of pros and cons, and the decision also depends on which options are taken into consideration for comparison. In this case of PPF vs tax saver bank FD, the latter outscores PPF in terms of liquidity, as the lock-in period of tax saver bank FD is 5 years, whereas PPF has a much longer lock-in period of 15 years.
As far as taxation on returns and capital protection are concerned, PPF tends to outscore bank tax-saving FD. This is because for tax-saving bank FD, your money is only protected up to Rs 5 lakh per customer per bank under DICGC, whereas money invested in PPF is completely safe, as it is managed by the Government of India and both the principal and interest components of PPF come under a sovereign-backed guarantee.
Even in terms of taxation of returns, PPF falls into the EEE category, so you do not get taxed for the amount invested, interest earned, or maturity proceeds as well. Whereas for bank FDs, besides the TDS, the interest income from FDs (including tax-saving FDs) is also taxed as per your tax slab.
Last but not the least is the returns on investment. Bank FD rates are currently on the higher side due to rising interest rate regime, with 5 year tax saver FD rates being around 6.5%-7.5% p.a., Rate of interest on PPF is 7.1% p.a. at present, making the returns on both these tax saving options not very far away from each other.?
So make sure to factor in all the parameters as discussed above if you are planning to invest in PPF or tax saver bank FD for tax saving.
For the latest and interesting financial news, keep reading Indiatimes Worth.?Click here