NSC vs PPF – Which One is Better? Similarities and Differences Explained

The majority of us prefer risk-free investments with guaranteed returns and have some kind of tax benefits attached to them to fulfil our financial goals. Among various investments that offer these benefits, two of them stand out. They are the National Savings Certificate (NSC) and the Public Provident Fund (PPF). Both are small savings schemes that help in fulfilling different financial goals. Read on to find out how these two stand against each other and which is a more suitable investment for you.

What is NSC or National Savings Certificate?

The National Saving Certificate (NSC) is a small savings scheme introduced by the government of India in 1989. The primary purpose of the scheme is to encourage savings among small and middle-income citizens. NSC pays a fixed interest at the time of maturity, but it is compounded annually. The scheme is regulated by the Ministry of Finance, which announces the interest rate every quarter. For the July – September 2023 quarter, the interest rate of the scheme is 7.7% per annum. You can invest in NSC through any post office or an authorized bank. If you are looking for an investment to save on tax and earn guaranteed returns for a tenure of five years, then NSC is your go-to investment.

Following are the features of NSC

• Minimum and maximum investment: The minimum investment in NSC is Rs 1,000, and there is no limit on the maximum investment.
• Number of accounts: You can open multiple NSC accounts in your name.
• Tenure: The tenure of the NSC is five years, and it cannot be extended after that.
• Interest payment: A fixed interest is compounded annually and is paid directly at the time of maturity.
• Lock-in period: The scheme has a lock-in period of five years.
• Eligibility: Only Indian citizens who are residents are allowed to invest in NSC. NRI (non-resident Indians), HUFs (Hindu Undivided Families) and trusts are not eligible to invest.
• Documents required: To open an NSC account, you will need an NSC application form, passport-size photograph, PAN Card, Aadhar Card, Passport or any government-issued ID card.
• Transfer: You can transfer your NSC account from your name to any other individual’s name. You can also transfer from one post office to another.
• Nomination: You can appoint a nominee for your NSC account.
• Premature withdrawal: The scheme doesn’t allow premature withdrawal before the completion of the tenure. Premature withdrawal is only allowed in case the NSC holder passes away or if the court orders it.
• Loan against NSC: Banks will give you an 80-90% loan against your NSC investment during the tenure.
• Tax implications: The principal amount up to Rs 1.5 lakhs is eligible for tax deduction under section 80C of the Income Tax Act, 1961. The interest is reinvested into the NSC account and hence is eligible for tax deduction. However, the interest earned in the final year is taxable as per your income tax slab rate.

What is PPF or Public Provident Fund?

The Public Provident Fund (PPF) is a small savings scheme introduced by the government in 1968. The primary aim of the scheme is to encourage long-term savings. The scheme pays a fixed interest on 31st March every year, but it is calculated on the minimum balance in the account between the 5th and 30th of every month. PPF has a tenure of 15 years, which means your investment is locked in during the entire tenure. You can also extend the scheme in blocks of five years after the tenure ends. The Ministry of Finance decides the PPF interest rate every quarter, and for the July-September 2023 quarter, the interest rate is 7.1%. You can invest in PPF through any post office or an authorized bank. If you want a risk-free long-term investment, then PPF suits you the best.

Following are the features of PPF

• Minimum and maximum investment: The minimum investment in PPF is Rs 500, and the maximum is Rs 1.5 lakhs per annum. You can invest more than Rs 1.5 lakhs per annum, but you will not receive any interest or tax benefits on the additional amount.
• Deposit frequency: You must invest at least once a year to keep your PPF account active. If you fail to invest once a year, the account will turn inactive.
• Joint account: The scheme doesn’t allow joint accounts. Moreover, you can only open one PPF account in your lifetime.
• Interest: The scheme pays a fixed interest every year, which is credited to your PPF account, and the rate of interest is decided by the government.
• Tenure: The scheme has a tenure of 15 years, which means you must stay invested in the scheme for 15 years. Once the tenure ends, you can extend it in a block of five years.
• Lock-in period: The scheme has a lock-in period of 15 years.
• Eligibility: To invest in PPF, you must be an Indian citizen and a resident. NRIs and HUFs are not allowed to invest in the scheme.
• Documents required: To open a PPF account, you will need an application form, passport-size photograph, PAN card, Aadhar card, nominee declaration form, and any other government-issued ID card.
• Nomination: You can appoint a nominee for your PPF account who will receive the benefits of the scheme upon your death.
• Tax implication: PPF falls under the EEE category. This means the investment, interest, and maturity benefits are all exempt from tax.
• Premature withdrawal: You can partially withdraw from your PPF account after completing six years of the tenure.
• Loan against PPF: PPF allows you to take a loan against your investment between 3rd and 6th year of the investment tenure. You can take a loan up to a maximum of 25% of the total available amount, and the maximum tenure is three years. You are eligible to take a second loan before the sixth year if you repay the first loan fully.

Similarities between NSC and PPF

The following are the similarities between NSC and PPF.

• Government schemes: Both PPF and NSC are government schemes that promote small savings.
• Pay fixed interest: PPF and NSC pay a fixed interest on the invested amount.
• Tax benefits: The investment in PPF and NSC qualifies for tax deduction under Section 80C of the Income Tax Act, 1961.
• Nomination facility: Both schemes have a nomination facility, which means you can appoint a nominee to your account.

Difference between NSC and PPF

NSC vs. PPF: Which is better?

Comparing NSC to PPF is like comparing apples to oranges. Both schemes are government schemes that fulfil two different investment purposes. PPF is a long-term investment scheme and can fulfil goals such as retirement or a child’s college education. NSC, on the other hand, is a short-term investment scheme and can fulfil short-term goals such as a house down payment or travelling.

You must select your investment based on your goals, investment horizon, and risk tolerance levels. NSC and PPF pay fixed interest and hence are risk-free investments. Hence, it’s up to you to choose which investment suits you the best based on your goals. You can also invest in both to fulfil your short and long-term goals and diversify your investment portfolio.

Frequently Asked Questions

Which is better, NSC or PPF?

NSC and PPF are two different government investments that fulfil different investment goals. NSC is for short-term goals, whereas PPF is for long-term goals. Hence, based on your goals and investment tenure, you must choose the one that best suits you.

Which is better, a five-year FD or NSC?

Fixed deposit rates vary from 3% to 8% based on the tenure and bank. On the other hand, the NSC interest rate is fixed at 7.7%. Before you invest in an FD or NSC, you must check the interest rate for your tenure and choose the one that gives you a higher interest rate.

Which scheme is better than PPF?

PPF is an excellent tax-saving investment. However, it has a lock-in period of 15 years and pays only a fixed interest of 7.1%. There is another tax-saving investment that has the potential to give higher returns, and it is ELSS funds. ELSS or Equity Linked Savings Schemes (ELSS) are tax-saving mutual funds with a lock-in period of 3 years. Since they invest in the equity markets, they can give higher returns than PPF in the long run. However, they are subject to market volatility and can result in losses in the short term.

Is NSC risky?

NSC is a government scheme that pays a fixed interest. Hence, it is a risk-free investment.

What are the disadvantages of PPF?

Although PPF is a good long-term investment scheme, it has several disadvantages. It has a lock-in period of 15 years, the maximum investment is only Rs 1.5 lakhs per annum, the interest rate is lower than equity market returns, has strict early withdrawal rules, and premature closure of the account if not possible.

Can I withdraw PPF after five years?

No, you can partially withdraw your investment in PPF after completing six years from the date of investment.

Can I deposit 1.5 lakh in PPF at one time?

Yes, you can invest a lumpsum amount in PPF. Alternatively, you can invest monthly, quarterly, or even at irregular intervals during the year.