Before investors could completely recover from the government of India’s Budget 2016 proposal with respect to EPFs, another adverse approach change concerning small saving schemes has stepped into the spotlight. One of the most popular small-saving schemes, PPF (public provident fund), will now bring an interest of 8.1% as against 8.7% earlier.
As government has chosen to cut the interest rate on the small saving plans, the time has come to return to the investment procedure.
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Public Provident Fund (PPF): The popular Public Provident Fund (PPF) yields 8.1% from April 1, 2016 contrasted with 8.7% previous financial year. In spite of the cut in rates, PPF still is a good bet as it has Exempt-Exempt-Exempt (EEE) tax status i.e. the principle invested, interest and maturity proceeds are all tax-exempt. Deposits into a PPF account qualify for tax deduction under Section 80C of the I-T Act.
• Debt mutual funds offer extension for capital gains when rates fall. This is because bond prices are inversely proportionate to interest rates. One can expect returns in the scope of 8-10% p.a. for a time horizon of 3 to 5 years.
• Tax-free bonds are suitable for individuals who are in highest tax bracket of 30% and need to create a stable income. These bonds also offer extension for capital gains when rates fall; this is not the case with PPF.
Conclusion: Before making investment choice which includes fixed income instruments, consider the following parameters:
1. Your requirement for regular income or cash flows.
2. Tax deduction under Sec 80C of I.T Act.
3. Liquidity, i.e. investment tenure or lock in period before which the principal amount cannot be withdrawn.