BackTax free bonds vs PPF: Which can be the best bet for your retirement?
Considering that they are issued by the government, tax-free bonds and Public Provident Fund (PPF) are two examples of investments that are considered as low-risk investments for tax savers.
PremiumConsidering that they are issued by the government, tax-free bonds and Public Provident Fund (PPF) are two examples of investments that are considered as low-risk investments for tax savers. PPF is a secure investment since it is backed by the government, in contrast to tax-free bonds that are issued by government-owned companies and have an excellent credit rating. Tax-free bonds are exempt from income tax, however, PPF offers tax benefits under Section 80C of the Income Tax Act of 1961, and even the interest received on PPF is tax-free. While PPF has a 15-year maturity period, tax-free bonds typically have a tenure of 10, 15, or 20 years. For retirement planning, among tax free bonds and PPF which can be the best bet for investors, let's know from our different industry experts.
Juzer Gabajiwala- Director, Ventura Securities
Tax-free bonds offer ~4.5% p.a. current yield on an average; the coupon rates are however higher as these have been issued more than 5-10 years back. Thus, the yield is lower than the current PPF (Public Provident Fund) rate of 7.1% p.a. which is also tax exempt. However, Tax-free bonds are relatively liquid than PPF which has a lock-in period of 15 years initially and then in block of 5 years each.
As regards Tax-free bonds are concerned, you cannot reinvest once the bonds mature. Additionally, you cannot invest more than Rs. 1.5 Lacs in PPF in a given financial year. You can claim the deduction for the investment made in PPF upto Rs. 1.50 lacs under section 80C which you cannot for Tax-free bonds. Tax-free bonds have an annual payout of interest which is not there in PPF.
Thus, you see that both Tax-free bonds and PPF are complementary and totally different products. While investing for retirement, you need to choose between them depending on the benefits and which is best suited to your needs. PPF is used more as an accumulation tool and bonds (Tax-free or otherwise) are looked at for investment for a regular income.
Dr. Kirti Sharma, Assistant Professor of Accounts & Finance at Great Lakes Institute of Management, Gurgaon
Many investors use Tax free bonds and tax saving bonds interchangeably but they are very different w.r.t tenure, taxability and overall returns. In Tax free bonds, only the interest income received is exempt in the hands of the investor. The initial investment in these bonds and the final redemption amount is not exempt from tax but they are very safe as they are government backed and have a long gestation period. These can be held both in physical form or demat form. Thus HNIs and institutions find these lucrative as there is no upper limit on investment.
On the other hand, PPF is an EEE instrument which means that investments in PPF are exempt, so is the interest and also the amount received on withdrawal. PPF can only be held in physical account and transactions need to be done like one is operating a bank account. It has a lock-in of 15 years which can be extended to another five years after completion of fifteen years on request without incurring interest loss.
However, if in dire need for funds, partial withdrawal is allowed in PPF in the beginning of seventh year. Also loan can be taken against PPF (from third year till 6th year) upto 25% of balance in the account in the preceding year at a fixed interest rate which is 1% higher than the prevailing government interest rate. Thus PPF offers liquidity and tax benefits to the investor right from beginning till the end. The only limitation with PPF is that the maximum investment limit is capped at Rs. 1.5 lacs per annum so an investor cannot think of making a bulk investment higher than this amount.
The PPF interest rate touched its peak @ 12% in 2000 thereafter in the last two decades it has been hovering around 8%. Tax free bonds bond coupon rates are varying from 5.5% to 7.5% but due to the tax benefit their post-tax yield is 100 basis points more compared to the yield of a tax saving bond.
While both the investment options have their pros and cons, for a retail investor PPF remains to be a popular choice for retirement than tax bonds. This is hugely because of the tax benefits.
Mohit Ralhan, Chief Executive Officer TIW Capital
If you are saving for retirement, which means that this investment amount will not be touched otherwise, then PPF is an excellent starting point. PPF investment up to INR 1.5 lac is tax-exempt under section 80C. The 7.1% interest on offer is also attractive considering it is tax-free. There is no credit risk as well since the borrower is the government.
However, if one has to deploy large funds then tax-free bonds might be a better choice. These instruments are floated by public sector undertakings like NHAI, IRFC, NHB, etc. and are usually rated AAA, so credit risk is minimal. Although the average yield mostly remains between 5.5% to 6.5%, some of these tax-free bonds may offer higher rates as well. Also, the bonds are listed on exchanges, so one can get out in case of liquidity requirements. A mix of PPF and tax-free bonds can be considered for retirement planning.
Ashish Misra, chief operating officer - retail banking at Fincare SFB
Public Provident Fund (PPF) and tax-free bonds are two common investment choices for retirement planning. Tax-free bonds have a fixed term of 10, 15, or 20 years and generate tax-free interest income. PPF, on the other hand, is a long-horizon investment with a 15-year duration that provides tax-free interest as well as tax savings benefits.
Although both alternatives offer tax-free returns, these have different liquidity, risk, and returns. Tax-free bonds can be traded on stock markets, giving the liquidity option, whereas PPF has a 15-year lock-in period, making it a long-term investment vehicle. Also, while PPF provides guaranteed returns and is supported by the Government of India, tax-free bonds are regarded as low-risk investments.
The decision between Tax-free bonds and PPF ultimately comes down to investing objectives, risk tolerance, and return expectations. Before making an investment selection, it's crucial to take into account variables including tax advantages, liquidity, and safety. Making an informed choice that supports your retirement objectives can also be facilitated by consulting with a financial advisor.
Rahul Jain, President & Head, Nuvama Wealth
With their long maturities of 15-20 years, tax-free bonds and PPF are ideal for long-term goals such as retirement. In the current market, tax-free bonds can yield up to 6%, while PPF pays an annual interest rate of 7.1%. Both these instruments are appealing. Both are risk-free because they are backed by the government or institutions backed by the government.
PPF is the better option because it pays higher interest and offers tax benefits. The pre-tax return on tax-free bonds can be as high as 9%. Many NCDs and bonds are currently offering interest rates ranging from 9.50% to 10%. Before deciding between tax-free bonds and NCDs or other similar options, investors must consider credit risk and post-tax returns.
Suraj Malik, Founder and Managing Partner, Legacy Growth
Tax free bond provides a steady return every year in the form of interest vis-a-vis PPF wherein interest gets accumulated in the corpus itself. Hence, PPF can be preferred from retirement planning perspective as the entire funds (including interest) is available after a defined period which would be a decent sum whereas in the tax free bond, only the principal amount would be available at the time of maturity since interest is already paid (might be spent) over a period of time.
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