National Saving Certificate vs FD

National-Saving-Certificate-vs-Fixed-Deposit

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According to section 80C of the Income Tax Act, there are several investment products that allow people to save up to Rs 1.5 lakh 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 Rs 1.5 lakh, u/s 80C

Income earned is fixed

Fixed interest rate for the entire duration of 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 loan

It can’t be used as a collateral

TDS Deduction

No TDS deduction

TDS is deducted

Interest rate

6.8%

Between 6-8% generally

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:

1. Interest earned on NSC is reinvested and eligible for benefit under Section 80C: 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 Rs 1.5 lakh. 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. 

2. 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. 

Interest rates: The interest rate on NSC is 6.8% per annum, compounding annually. On the other hand, the interest rate on tax-saving FDs ranges between 6-8%. 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. 

3. No deduction of TDS on NSC interest: 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 Rs 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 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. Also, NSC certificates can be used as collateral to obtain a loan. 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.

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