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Exhausted your PPF investment limit?

Yatheendradas C.k. at 10:39 PM - May 31, 2019 ( ) Views: 133

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Exhausted your PPF investment limit? Here are some other fixed investment options for risk-averse investors
By: Amitava Chakrabarty | Updated: May 31, 2019 4:19:53 PM  The Finacial Express
Apart from attractive interest rates, PPF provides tax benefits on investment amount as well as the interest and maturity amounts are tax free.

Equity mutual funds (MFs), including Equity-Linked Savings Schemes (ELSS), provide better returns than many other investment options in the long run, but these are not suitable for risk-averse investors as mutual fund investment is subject to market risks. In fact, the Public Provident Fund (PPF) is the most attractive option for the risk-averse people to park their money for the long term.

Apart from attractive interest rates, PPF provides tax benefits on investment amount as well as the interest and maturity amounts are tax free. Currently, the PPF interest rate is 8 per cent and as the return is tax free, it is equivalent to taxable return of 11.43 per cent for people in 30 per cent tax bracket, 10 per cent for those in 20 per cent tax bracket and 8.89 per cent for investors in 10 per cent bracket. The investment period for PPF is 15 years, which may be extended any number of times for a block of 5 years each. Moreover, PPF is considered as the safest product because the investment amount carries sovereign guarantee of the Government of India and the fund is protected against attachment through any decree of law.

But the limitation with PPF is that an individual may invest only up to Rs 1,50,000 in a financial year. So, once the limit is exhausted, the investor will have to look for other investment options. Although, NPS is an excellent investment, but it is also subject to market risks. Sukanya Samriddhi Yojana (SSY) is the most attractive investment option for risk averse investors due to sovereign guarantee, tax benefits on investment, tax-free returns and even higher interest rate than PPF. But everyone can’t invest in SSY. Only parents or legal guardian of a girl child may open an SSY account till the girl turns 10 years old.

Following are some of good fixed investment options for risk averse general investors after exhausting PPF limit:

Bank Fixed Deposit (FD)
Any investor may visit a bank and invest in fixed deposit (FD) with simple KYC norms. Because of goodwill of banks and ease of investment, FD is one of the most favourite investments in India. Currently the interest rate offered by leading PSU and private banks on 5 to 10 years FD is around 6.5 per cent.

Advantages:

No market risks.
Fixed maturity value.
Interest rate remain fixed for the tenure of investment.
80C benefits on FDs of tenure of 5 years or more.
Disadvantages:

Interest on FDs are taxable. So, rate of return after tax would be 4.55 per cent for investors in 30 per cent tax bracket, 5.2 per cent for those in 20 per cent tax bracket and 5.85 per cent for people in 10 per cent tax bracket.
At the time of reinvest the money after 5 or 10 years, the interest rate may change, so there are reinvestment risks.
No sovereign guarantee to protect the capital invested.
Post Office Time Deposits
Post Office Time Deposits are also one of the most favourite investments especially among investors of rural areas due to accessibility in far flung areas and easy investment process. Currently the interest rate offered by leading Post Office on 5-year time deposit is 7.8 per cent.

Advantages:

No market risks.
Fixed maturity value.
Interest rate remain fixed for the tenure of investment.
80C benefits on investment.
Sovereign guarantee.
Disadvantages:

Interest on Post Office Time Deposits are taxable. So, rate of return after tax would be 5.46 per cent for investors in 30 per cent tax bracket, 6.24 per cent for those in 20 per cent tax bracket and 7.02 per cent for people in 10 per cent tax bracket.
At the time of reinvest the money after 5 years, the interest rate may change, so there are reinvestment risks.
National Savings Certificate (NSC)
National Savings Certificates are one of the popular tax-saving investment options which currently offers interest rate of 8 per cent. There is no maximum limit for investment in NSC.

Advantages:

No market risks.
Fixed maturity value.
Interest rate remain fixed for the tenure of investment.
80C benefits on investment.
Sovereign guarantee.
Disadvantages:

Interest on NSC are taxable on accrual basis, but deemed to be reinvested u/s 80C, benefit of which would not be available if 80C limit of Rs 1,50,000 is already exhausted. So, rate of return after tax would be 5.6 per cent for investors in 30 per cent tax bracket, 6.4 per cent for those in 20 per cent tax bracket and 7.2 per cent for people in 10 per cent tax bracket.
At the time of reinvest the money after 5 years, the interest rate may change, so there are reinvestment risks.
Single Premium Insurance Plans
Buying a Single Premium Insurance Plan is another fixed investment option where the investor may choose the term of plan according to his/her convenience and the limit of investment would depend on age and income of the investor. Take for example single premium option of LIC’s plain vanilla endowment plan where the minimum and maximum age of entry are 90 days (completed) and 65 years (nearest birthday) respectively, while the maximum maturity age is 75 years. If the term is taken 15 years – same as PPF – taking into consideration the current bonus rate, the rate of return would vary from 6.4 per cent (for a 3-year old investor) to 5.9 per cent (for a 60-year old investor).

Advantages:

No market risks.
Insurance cover for the term of investment without the chance of lapsing.
Tax-free return. So, taking average return of 6.2 per cent, it will be equivalent to taxable return of 8.86 per cent for people in 30 per cent tax bracket, 7.75 per cent for those in 20 per cent tax bracket and 6.89 per cent for people in 10 per cent tax bracket.
80C benefits on investment.
Sovereign guarantee on Sum Assured and accumulated bonus on policies taken from LIC of India (private insurers don’t enjoy this benefit).
Disadvantages:

Rate of returns vary from policy to policy and company to company depending on premium amount, sum assured and bonus rate.
Bonus and bonus rates are not guaranteed. So, the investors need to check the bonus history before investing.
Long proposal form makes the investment process cumbersome.
GST (at a current effective rate of 4.5 per cent) is levied on premium amount.


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