InvestorQ : Which secure investment can provide highest returns p.a.?
Nehal Singhal made post

Which secure investment can provide highest returns p.a.?

Mahima Roy answered.
2 years ago

There are a number of secure investments that give attractive returns. When we talk about returns you must always look at it in post tax effective terms. Take the case of PPF. The return on these PPF may be less than 8% but there are some many benefits. These are outlined as under:

a) The interest earned on the PPF annually is totally tax free in the hands of the investor. If you are in the 20% tax bracket, then your effective interest rate on PPF will be 10% and not 8%. Of course, if you are in the 30% tax bracket then the benefit will be higher.

b) In addition, the contribution made for PPF is exempt under Section 80C of the Income Tax Act up to an outer limit of Rs.150,000 per annum. So, again if you are in the 20% tax bracket then you can actually get that as an exemption from your income. Here again, the benefit will be much higher if you are in the 30% bracket.

To sum it up, the 8% interest you earn is actually equal to 10% because the interest is tax free. In addition, if you contribute Rs.100, it is equal to contributing just Rs.80 as you get back Rs.20 as exemption. In short you earn Rs.10 on Rs.80 investment which is an effective rate of return of 12.5%. If you are in the 30% bracket, then your effective yield considering tax free interest and Section 80C will be above 16%. That is why the PPF is so attractive on a net of tax basis.