NSC vs. 5-Year FD: Which Is A Better Tax-Saving Investment?
National Saving Certificate (NSC) is a savings bond which is provided by the Indian government via the post offices of the country. It comes with a lock-in period of five years.
5-year FDs are fixed deposits wherein the principal amount is locked-in for a period of five years. These deposits are also known as tax-saving deposits since they are exempted from tax deductions (up to INR 1,50 lakhs).
Both NSC and FD are popular investment instruments since they are safe from market risks. These low-risk investments are exceptional tools for diversifying your investment portfolio. The interest earnings are fixed on both, NSC and tax-saving FD provide greater returns due to their fixed lock-in periods. Both the instruments are eligible for tax exemption under section 80C, up to INR 1.50 lakhs.
Let’s see what are the differences between these two instruments and which of these works best for your investment portfolio:
Interest rate of NSC can vary quarterly, but the effective interest rate stays constant at from 8%. The NSC interest rate is calculated as compound interest over a tenor of every year. But, the interest earned on NSC is re-invested instead by being directly paid to the investor. This interest amount is eligible for tax benefit under section 80C.
On the other hand, 5-year FD which is a cumulative FD has different interest rates according to the bank or NBFC and can be compounded on a monthly, quarterly, half-yearly, or annual basis. Bajaj Finance is offering interest rates up to 8.75% on the fixed deposits, and senior citizens can avail interest rates as high as 9.10%. NSC does not differentiate the interest rate on the basis of age and therefore the interest rate is the same for all the investors.
The online FD calculator helps you calculate the actual returns due to you upon maturity.
Taxes are not applicable on the interest that you earn by investing in NSC as the taxes get exempted as per Section 80C. TDS (Tax deducted at source) is also not applicable to the accumulated interest of NSC.
On fixed deposits, no taxes are levied for interest earnings up to 40,000 INR (per Interim Budget, 2019). However, when it comes to tax saving FDs, tax benefits are much greater than regular FDs. By investing in a tax saving FD that has a lock-in period of 5 years, you can claim tax deductions up to 1,50,000 INR. TDS is applicable on fixed deposits, but it can be claimed by submitting form 15G or 15H. In case the investor does not submit the PAN, then the TDS deduction on FD Interest rate will be at 20%.
Tax-saving FDs are of two types viz. single account holder FDs and joint account holder FDs. If the FD is deposited in a joint account, the tax exemption is applicable only for the first account holder.
Senior citizens have to submit form 15H whereas individuals below 60 years of age can submit form 15G to get TDS benefits. People who wish to avail these benefits should fill and submit this form at the beginning of the year.
Individuals who invest in tax-saving deposits can opt either for non-cumulative interest payouts or periodic payouts.
People who invest in NSCs can only avail the interest when it matures. Also, a substantial part of the interest is reinvested further for another term.
Why should you go for 5-year FD?
5-year or tax-saving FD is a smart option for the people who are looking for a secure tax saving instrument. You can improve your earnings by investing in high-yielding FDs
By investing in this scheme, you get guaranteed returns and an option of periodic payments. Tax–saving FDs provide the facility of transferring funds between two accounts which belong to the same bank branch. An individual who is a minor can also invest in the tax saving FD by opening a joint account with an adult.
NBFCs like Bajaj Finance provide high-interest rates for 5-year tax-saving FD which are further higher for senior citizens. If you compare this FD with other types of debt investments, you will find that it has the shortest lock-in period. Moreover, these deposits are certified for their safety and stability by CRISIL and ICRA. All these reasons make the 5-year FD a perfect and safe instrument for investment.