Can anyone please suggest correct encoding settings.

Hi Brian, the lines you are seeing are 2 TV fields combined into 1 frame and as you have seen, are mostly visible on panning shots and major motion within the clip. 

Here's a couple of ways to remove that issue:

1. when you create a sequence in Premiere Pro go to the > sequence settings in the > sequence menu and set the fields dropdown menu to 'No Fields (Progressive Scan)' - see attached image. Now when you drop your digitised VHS material into this sequence one of the fields will be removed and you will no longer get the 'herringbone' look from combined fields in your exported clips.

The disadvantage of this is you are losing half your picture information and resolution.

Option 2. leave your sequence settings the way you (probably) already have them (which is likely Fields: Lower Field First) but when you export your clip, in the export dialogue window change the Frame Rate to 59.94* under the  Video > Basic Video Settings panel (see attached image).

Option 3: Buy a Deinterlacing plugin like RevisionFX Fieldskit Deinterlacer. But be prepared for a lot of experimentation (and lots of settings) + long render times - so while a great solution (I use it for Broadcast work) - not recommended in your case due to the amount of material.

Re: Archiving:

If you have lots of material I would suggest you export to H.264 with the preset at 'Match Source - High Bitrate'.

However if you decide to go with the 59.94 frame rate you will then need to click the preset dropdown menu > scroll up to 'Custom' and then change the frame rate in the 'Basic Video Settings' window.

Let me know if anything is unclear, regards SteveG

*59.94 assumes you are working with NTSC video material (i.e. North America). For most of the rest of the world (including here is Australia) it would need to be set at 50 for the frame rate.

** You don't necessarily have to go with a High Bitrate. For SD material (VHS) you could likely get away with a lower datarate - say about 6-7Mbps and this would make for smaller final files if storage space is an issue ... but something to consider later!