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National Saving Certificate or Fixed Deposit

Last Updated 27th Nov 2021

National Saving Certificate Fixed Deposit
The Central government governs the rate of interest on NSC Fixed Deposit rates are determined by bank based on demand-supply factors
Earn returns upto 6.8% on NSC Earn returns upto 6.95% on FD
Invest for a period of 5 years or 10 years FD investment can be done for a period of 7 Days to 10 years
No TDS deduction is allowed in case of interest earned on NSC certificates. Banks deduct TDS on Fixed Deposits @10% & 20% if Interest earned on FD exceeds ₹ 10,000
In the case of NSC, the compounding frequency is annual. The compounding frequency in case of tax-saving FD is generally on a quarterly basis.
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National Saving Certificate or FD

According to section 80C of the Income Tax Act, there are several investment products that allow people to save up to ₹ 15,00,000 in tax in a financial year. These include two main products – National Saving Certificate and Tax Savings Fixed Deposits with banks or post offices. NSC and FDs are safer investment instruments but are not liquid. Both of them have a lock-in period of five years. Therefore, if you’re looking for investments with a medium or long time horizon, you can consider these options.

Common Features of NSC and FDs

Lock-in period 5 years
Tax benefit Tax benefit up to ₹ 1,50,000 u/s 80C
Income earned is fixed Fixed interest rate for the entire duration of the investment
Maximum investment limit No bar on the maximum amount of investment

Difference Between NSC And Tax-Saving FD

Here are the major differences between NSC and tax-saving FD:

Features NSC Tax-Saving Fixed Deposits
Liquidity NSC can be used as collateral against the loan It can’t be used as a collateral
TDS Deduction No TDS deduction TDS is deducted
Interest Rate 6.8% 6.95%
Compounding Frequency Annual Quarterly in general

Let’s have a look at how NSC and FDs stack up against each other as tax-saving investments:

  • Tax Benefits:Interest earned on National Saving Certificate and tax-saving FDs is taxable in the hands of the investor under the head ‘Income from other Sources’ as per the current tax laws. However, the interest earned on NSC is not paid out to the investor and instead reinvested, and this interest amount is eligible for tax benefit under section 80C.

    In order to avail the benefit of interest reinvested in NSC, you need first to show the interest accrued as Income from other sources and then claim the deduction under section 80C within the overall limit of ₹ 1,50,000. However, please note that only the interest accrued for four years qualifies for this deduction. The interest accrued in the fifth year gets paid to the investor along with the maturity amount; hence it’s not eligible for deduction.

    But in the case of cumulative FDs, the interest earned and reinvested is not eligible for tax benefit under section 80C.

  • Interest rate differential: The interest rates on NSC are being decided by the central government, whereas in the case of FDs, it is decided by the banks. The interest rate on NSC is 6.8% compounding annually. On the other hand, you can earn upto 6.95% on FD. In the case of NSC, the interest rate is the same for all investors, irrespective of age. While banks offer a higher interest rate to senior citizens. However, you should not just consider the interest rates while opting for investment schemes. Frequency of compounding and tax deducted at source also play an important role in determining how much money you’ll earn at the time of maturity. If higher compounding frequency is available, you can earn high interest.
  • Compounding frequency: In the case of NSC, the compounding frequency is annual, while in tax-savings FDs, the compounding frequency is generally on a quarterly basis.
  • TDS Deduction: No TDS deduction is allowed in case of interest earned on NSC certificates, whereas TDS is deducted on the interest earned on tax-saving FDs. The TDS is deducted at the rate of 10 percent if interest accrued or paid out exceeds ₹ 10,000 in a financial year. In case the PAN of an investor is not available, then the TDS will be deducted at 20 percent. If an investor wants the refund of TDS deduction, he/she needs to file an Income Tax Return even if the total income is less than the maximum tax-exempted limits. However, an investor has the option to submit Form 15G or Form 15H for senior citizens to avoid TDS deduction.
  • Loan: Also, NSC certificates can be used as collateral to obtain a loan. On the other hand, Tax-savings FDs cannot be used as collateral to obtain a loan. .

What You Should Do?

So, as an investor, you need to consider all the above factors when choosing the correct instrument to invest in. In addition, you must remember that the interest earned on the NSC certificates and cumulative bank FD will get accrued but will not be paid out. Therefore, you should consider investing in either of these two only if your expenses can be well managed without regular interest income from these investments.


Is FD better than NSC?

FD scheme cannot be considered a better scheme than NSC as NSC is a compounding scheme the Interest earned on NSC is reinvested and is thus not taxable for upto 4 years. In the case of FD, the Interest is taxable if it exceeds ₹ 10,000. Also, both the scheme offers tax exemption upto ₹ 1.50 Lakh on the principal amount of investment.

Is NSC a good investment?

NSC or National Saving Certificate is a government scheme that provides fixed and secured returns on your investments. Along with the regular returns, NSC also offers tax benefits. Under Sec 80 C of the Income Tax Act, investors can get tax exemption up to ₹ 1.50 Lakh per annum on their investments. Along with that, No TDS deduction is allowed in case of Interest earned on NSC certificates.

Is NSC tax-free?

NSC is a cumulative scheme. Thus, the Interest earned on a National Saving Certificate accumulates in the account and is reinvested. Along with that, the principal amount of NSC is exempted up to ₹ 1.50 Lakh under Section 80 C of the Income Tax Act.

Can I avail loan against NSC & FD?

NSC Certificates can be used as collateral to avail a loan. In the case of FD, you cannot avail a loan against a tax-saver FD.

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