PPF (Public Provident Fund) and NSC (National Savings Certificate) are popular small savings schemes.
The government has revised lower interest rates for small savings schemes, including NSC, KVP and PPF, for the quarter starting January 1, 2017. The interest rate on five-year National Savings Certificate or NSC has been cut by 20 basis points to 7.6 per cent, from 7.8 per cent earlier. Similarly, the interest rate on popular small savings scheme PPF or public provident fund has been lowered to 7.6 per cent, from 7.8 per cent. The interest rate on Kisan Vikas Patra or KVP has been cut to 7.3 per cent, which means they will mature in 118 months, from 7.5 per cent earlier.
Income Tax And Other Benefits Of PPF
PPF enjoys EEE or exempt, exempt, exempt status in terms of income tax implications. This means contribution, interest and maturity proceeds all are tax free. Deposits in a PPF account are eligible for tax deductions under Section 80C of income tax law. A maximum of Rs. 1.5 lakh can be claimed for tax deduction in a financial year under Section 80C.
PPF accounts have a maturity of 15 years. It can be extended in blocks of five years. The PPF account holder needs to make a minimum deposit of Rs. 500 in a year. The maximum deposit allowed in a year is Rs. 1.5 lakh.
Premature closure of PPF account is allowed only under specific conditions like expenditure towards medical treatment and higher education. The account has to complete at least five financial years.
Withdrawal from PPF account is permissible every year from the seventh financial year of the date of opening of the account. A depositor can also avail of loan facility in the third financial year from the financial year in which the PPF account was opened.
Interest Rate On Small Saving Schemes Effective January 1, 2018
Instrument Rate of interest (%) from 01/10/2017 To 31/12/2017 Rate of interest (%) from 01/01/2018 to 31/03/2018 Compounding freqency
Savings deposit 4 4 annually
1 year time deposit 6.8 6.6 quarterly
2 year time deposit 6.9 6.7 quarterly
3 year time deposit 7.1 6.9 quarterly
5 year time deposit 7.6 7.4 quarterly
5 year recurring deposit 7.1 6.9 quarterly
5 year Senior Citizen Savings Scheme 8.3 8.3 quarterly and paid
5 year monthly income income scheme 7.5 7.3 monthly and paid
5 year National Savings Certificate 7.8 7.6 annually
Public Provident Fund 7.8 7.6 annually
Kisan Vikas Patra 7.5 (will mature in 115 months) 7.3 (will mature in 118 months) annually
Sukanya Samriddhi Account Scheme 8.3 8.1 annually
(Interest rates on small savings schemes from January 1, 2018. Source: Ministry of Finance)
Income Tax And Other Benefits Of NSC
There is no maximum limit for investment in NSC and it has a maturity period of five years. No TDS or tax deducted at source is deducted on such interest earned from NSC, which matures in five years. NSC certificates can be kept as collateral security to get loan from banks. Investment of up to Rs. 1.5 lakh in NSC can qualify for income tax deduction under Section 80C of the Income Tax Act. In addition, interest accrued yearly on NSC is deemed to be reinvested on behalf of the investor and qualifies for deduction under Section 80C within this total limit.
But since the interest accrued on NSC in the last year of the certificate’s term is not reinvested, it cannot be claimed as a deduction from taxable income under Section 80C. Therefore, the interest earned in the last year is added to the income of the investor in the year of accrual.