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The most important issue!
Both these investments fall underSection 80C. That means the investments made under this section are eligiblefor an income deduction upto a maximum Rs 1,00,000.
This is as far asyour principal investment goes.
Let's look at the interest earned.
With PPF, you pay no tax on theinterest you earn.
What about NSC?
Till FY 2004-'05, an individual could avail of a deduction under Section 80L ofthe Income Tax Act. This limit was Rs 12,000 of interest income received duringthe financial year.
This deduction has been done away with from FY 2005-'06. Now, all interestincome is taxable at the respective slab rate of the individual.
The interest accrued on NSC istaxable. But, it is also eligible for a deduction under Section 80C.
Generally, it is advisable todeclare accrued interest on NSC on a yearly basis. So, over the period of sixyears, you could declare the interest income for each year. In such a case, itdoes not amount to a huge sum.
If you do not declare the intereston accrual basis, then the entire interest earned (difference between theamount deposited and the maturity value) would accumulate in the year ofmaturity. You could then claim it under Section 80C but it would be a hugeamount and would be taxable at the current applicable tax rate.
How long do I hold it?
PPF is for 15 years, but youcan extend it for a block of five years. Let's say you open a PPF accountwhen you are 21 years old. It matures when you are in your late 30s, when youmay be earning well and may not need the money. In that case, you can continuewith the account.
Of course, you do have the option ofwithdrawing the entire balance on maturity, that is, after 15 years of theclose of the financial year in which you opened the account.
So, if you opened it in FY 2006-07(this financial year), you will be able to withdraw it 15 years later, startingMarch 31, 2007 (end of this financial year). That is April 1, 2022.
If you extend it for five yearsafter that, you continue to earn the rate of interest and can also make freshdeposits and get the tax benefit.
NSC is for a much shorter duration-- just six years from the date of investment.
How many can I have?
Once you open an NSC, you can't keepadding to it. You will have to buy another. Let's say you buy a NSC of Rs30,000. In a year's time, you want to add another Rs 30,000. You cannot add itto this amount. You will have to buy another NSC.
With PPF, you can have just oneaccount. But this does not matter because you have to make annual additions.Every year, you keep adding to it.
However, if you like the safety ofthe investment and a guaranteed return of 8% per annum, you can open one inyour child's name.
So you can have one account for yourself and one for your child. But this doesnot mean the tax benefit is doubled. The limit is the same -- Rs 70,000, irrespectiveif it all goes in your account or in your account and your child's.
Let's say you open an account foryour minor child. You can deposit Rs 70,000 in your account and Rs 70,000 inyour child's account. But you will only get the tax benefit on Rs 70,000.
How is it held?
The PPF account cannot be heldjointly. You can nominate someone but it cannot be jointly held with someoneelse.
With NSC, you can hold it jointly or you can hold it singly and nominatesomeone.
Where can I open it?
To open a PPF account, you can dropby a State Bank of India branch. No, you do not have to have an account withthem.
You can also ask your nationalisedbank where you have an account if they are authorised to open PPF accounts. Youcan also approach the head post office in your area. If that isinconvenient, ask your local post office (selection grade sub post officesare allowed to do so).
To buy an NSC, just approach anypost office.
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