Recently, someone pointed out to me that the PPF interest rate is now at 7.9% – the lowest in 40 years.
In fact, The interest rates on various saving schemes are falling and savers are finding it difficult to decide where to put the money for getting better returns.
There is a slight problem with this thinking. We tend to look at interest rate as standalone. However, what needs to be noted is the post tax, post inflation return of an investment.
Next, interest rates typically move in line with the inflation scenario in the economy. As inflation is cooling, the interest rates too are.
With this background, let us see which savings or investment options suit your money. There are multiple options with you to park your money – PPF, VPF, NPS and various debt funds.
Public Provident Fund or PPF
As mentioned before, the current interest rate of 7.9% on PPF is at its 40 year low. However, there are several positive things about PPF that you should take into account.
There is no taxation associated with PPF investment either with original investment, the interest received and the final maturity value. It is tax exempt at all stages. So, the rate of interest is the net in hand. You have to account for inflation of course.
Thus for most people PPF offers a compelling saving option for their long term needs. As few would know, a PPF account can be attached by a legal decree of the court. Not to forget, it comes with a sovereign guarantee.
Voluntary Provident Fund (VPF)
While EPF/VPF is only for organised sector workers/employees. For someone who cannot access VPF, PPF is the ultimate investment option with a promise of safety and guarantee.
VPF is a subset of EPF. Like EPF it enjoys a tax exempt status at all stages.
EPF did see a host of changes in the rules last year, which at that time were rolled back. They are likely to make a come back again. VPF too will be affected by those changes.
EPFO has already started investing a portion of its incremental investment in stocks. A latest news report pegs the number at Rs. 20,000 crore of the current year 207-18. So EPF/VPF do not remain a pure debt investment as they were before.
Recently, there was news about individuals being allowed to shift their EPF corpus to NPS. This marks a gradual progress towards a merger with National Pension Scheme.
National Pension Scheme (NPS)
This brings us to another investment option, the NPS. NPS offers 3 (now 4) types of investment categories – pure government securities, corporate bonds, equity and alternative investments.
One can create one’s own mix of investments using the above options. The returns from NPS are not guaranteed and the withdrawals are also subject to rules. Only upto 40% of the maturity corpus can be withdrawn tax free. Minimum 40% has to be converted into an annuity.
Your investment in NPS can get you a tax benefit though subject to specified limits.
Read more about NPS here, here and here.
Debt Mutual Funds
The other option is the debt mutual fund. For a highest tax bracket individual, a debt fund can make more sense. It delivers reasonable returns in line with the yields and allows for lower tax incidence.
If you hold a debt fund for more than 3 years, the gains are taxed as long term at a reduced rate of 20% post indexation. So, at 5% average inflation index value and 7% returns per year, the final tax works out to roughly 6% of the capital gains. Compare this with 30% tax on Bank FD Investments.
It also comes at a great flexibility. There are no restrictions on investments and withdrawals. Remember though, that the returns are subject to the markets and are not guaranteed.
Finally, for most part of their existence, the saving rates of PPF, EPF, VPF were administered by the Govt. However, the rates are now benchmarked to Government Security yields. They may move up or down based on the changes in such benchmark yield.
In summary
PPF
Pros – Works for those not covered by EPF such as self employed, guaranteed returns, tax free returns, loan facility
Cons – Longer maturity tenure, interest rates may change frequently
VPF
Pros – Works great for organised sector, guaranteed returns, tax free, advance facility for various needs, you can withdraw full after being unemployed for just 60 days
Cons – Restrictive rules may be introduced, interest rates may change frequently
NPS
Pros – One can define own mix of investments, market linked returns, anyone can subscribe, defer taxation to maturity, partial withdrawals, no investment limits
Cons – No guaranteed returns, subject to market risks, restrictive withdrawals on maturity, compulsory annuity
Debt Funds
Pros – Lower long term capital gains tax, market linked returns, flexibility to enter and exit
Cons – Subject to market risks, short term gains (less than 3 years) taxed as per marginal tax rate
What instruments do you use? Do share with us.
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