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Case Study – Bank Deposits Or PPF Which One To Select For 80C Benefits:


Santosh is in great dilemma.He have a scope for  investment of Rs.50,000 U/S 80C and save some tax.He have invested Rs.50000/- in ELSS and insurance policy already and want to have some safe investment for remaining amount.

When any one talk about safe investment U/S. 80C,two options always comes in mind.

Just we will take a view of both of the products and will compare some features..

We will compare following futures:

  1. Maturity Proceeds.
  2. 80C Limits.
  3. Interest Rates.
  4. Compounding Frequency.
  5. Lock in Period.
  6. Partial Withdrawal.

Maturity Proceeds:

  • Bank deposits: Interest received is taxable.
  • PPF: Interest is tax free.

80-C Limit:

Both options have limit of Rs.1 lakh.Santosh require to invest Rs.50000/- so fits in the both options.

Rate Of Interest:

  •  Bank deposits:Interest rate is fixed for complete tenure.Currently highest rate is offered by IDBI bank with interest rate of 9.50%.This rate of interest will be  fixed for the complete tenure of the deposits..
  •  PPF: current rate of interest is 8.6% and its dynamic…It can be go up or go down..interest  accured will be calculated as per rates set for that period..

Compounding Frequency:

  • Bank deposits: compounded quarterly.
  • PPF: Compounded annually.
  • I think this feature is not of much worth considering..

Lock-In Period:

  • Bank Deposits: 5 Yrs.
  • PPF: Lock in period of 15 yrs, but partial withdrawal possible after 7th year as per conditions  set.

Premature withdrawal:

  • Bank Deposits: While depositing money in tax saver fixed deposits,depositor have an option to choose from: Cumulative,quarterly interest payout,Half-yearly  interest payout,annually interest payout.In case of cumulative option,principal and accumulated interest will be only available at maturity i.e after 5 yrs…In other cases,interest payout will be received as per chosen frequency and principal will be payable after completion of lock in period.
  • PPF: Premature withdrawal is possible after completion of 7th yr.with certain terms..withdrawal is possible once in a year after 7th yr and this amount should not exceed, 50% of the balance at the end of 4th year or 50% of the balance of the preceding yr,,which one is lower.
Each product have its pros and cons..Santosh needs to take the decision based on his needs or requirements in shorter/ longer term depending upon his liabilities..
Suppose his plan is to buy the home within few years then he may not want to lock money for longer period of 15 years..as he may require some good cash while buying the home.
This one is a real scenario limited to 80C benefits …investing in PPF and deposits both important but balanced way,isn’t it?
Please Note: Here we have considered that both PPF / FD accounts to be opened afresh.

 


Category: Fixed Income

Tagged: , ,

One Response

  1. BS says:

    ASSUMING YEARLY INCOME 6LAK, THE EPF AMOUNT DEDUCTED FROM 6 LAKH AND THEN TAX CALCULATED? SUPOSE AM INVESTING 30000 YEARLY INPPF THEN TAX EXEMPTION IS ON 6 LAKH MINUS 30000? EVERYWHERE AM READING TAX FREE BUT IT IS INTEREST IS TAX FREE OR WHOLE INVESTMENT?

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