December 20, 2010 11:28 am
now even bank fd is paying higher interest than ppf (axis 8.25% in my case) then what is the advantage of investing in ppf… is that for tax benefit?
Apart from tax savings PPF provides tax free returns unlike FDs. Secondly today the FD rates are more than PPF returns but tomorrow FD rates may be lower.
Choose to invest in disciplined areas and avoid risky ventures.
PPF is non-taxable even with the current DTC Draft. It is a illiquid long-term product giving returns of 8% exactly.
When you compare it with FD, FD rates keep fluctuating and currently for the current year you have 8.25% (and even 9% for 1100 days in some banks) and if you fall under 0% tax rate, certainly at this juncture for this 1100 days FD may seem lucrative.
Both of them are used for different purposes.
If you have a goal that is to be attained in a year or two, then that money should be kept in the FD even if you get slightly lesser returns for the safety of it.
For retirement purposes, you have to keep the money in PPF, for longer term you will keep it here. This is mainly for the safety and to control the urge of spending if you have the liquidity of cash in your hand.
Whether returns from PPF is tax free or not will be known once final DTC is implemented.’
However PPF is still good tool for long term investment.
With current DTC PPF is not taxable and given free cheap money govt gets from public, they will only be fool if they make it taxable , They will only loose by making it taxable
want to discuss this point number 2.
How come FD is better than PPF in terms of returns? Even if FD offers say 8.25% then after tax, won’t the returns be less than 8%? Whereas returns from PPF are fixed at 8%.
The point is the interest from FD is added to the income and then taxed accordingly. If the income is not very high (say 0% or 10% bracket), then it will be only be taxed in that way. Then 8.25% becomes either 8.25% or 7.4% respectively. In the latter case, will you have 7.4% with other benefits or 8%.
Not everyone is taxed @30.9%!
The pros have been very well iterated.
1. Relative illiquidity.
2. If you do not require tax benefits, then your bank FD is a better thing than PPF.
3. The upper limit of investing in a particular year is 70k.
4. At present, the interest rate on PPF is 8%. It is not necessarily going to remain at this level. In future, it will go only down not up! So you need to figure in that part also.
You should look at PPF as very long term wealth building product, It has some special features ,
1. tax advatange on deposit (80C) , no tax on interest earned and no tax at the time of withdrawal .
2. So 8% is the final return in the hand of investor.
3. Also as Anand said , it is just a forced saving which we gets locked , so we have some descipline in not taking out the money .
4. Bank FD interest is taxable and final return in hand is around 5-6% only .
Even Endowment plans give less return than Bank FD ,
Remember that interest on FD is taxable whereas interest on PPF is NOT.
The fact that we cannnot withdraw much from PPF is actually an advantage; otherwise FD will mature and you will think where to spend that money.
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