National Savings Certificate Vs Fixed Deposits

As per section 80C of the IT Act, many investment products enable people to save a maximum of Rs.1, 50, 000 on tax in one financial year. The two main products in which most of the people invest u/s 80C are – National Savings Certificate (NSC) and Fixed Deposits (FDs). Even though both are safer options for investment, but they are not liquid.

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They both have a lock-in period of 5 years and if one is looking for a long-term investment option, then a fixed deposit scheme and NSC are the best options. However, if you want to select one of these two, then we are here providing a comparative analysis of FD and NSC:

Comparison Between
Fixed Deposits, Guaranteed Return Plans & Debt Mutual Fund
Guaranteed Return Plans, Fixed Deposits &
Debt Mutual Fund
Guaranteed Return Plans
Returns Before Tax
7.5% (TAX-FREE)
Returns After Tax
7.5%
Guaranteed Returns
Yes
Life Cover
Yes
Tax on Profit
Tax Free*
Risk
No Risk
awards
Still Better than FD’s and Debt Mutual Fund
Fixed Deposits
Returns Before Tax
7% (TAXABLE)
Returns After Tax
4.8%
Guaranteed Returns
Yes
Life Cover
No
Tax on Profit
Taxable
Risk
Low Risk
Debt Mutual Fund
Returns Before Tax
8% (TAXABLE)
Returns After Tax
5.5%
Guaranteed Returns
No
Life Cover
No
Tax on Profit
Taxable
Risk
High Risk
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Let us start with the common features of these two saving products:

FD and NSC - Common Features

Features
  Fixed Deposit NSC
Lock-In Period Five Years Five Years
Maximum Investment Limit No Bar No Bar
Tax Benefit Up to Rs.1, 50, 000 Up to Rs.1, 50, 000

FD and NSC – Different Features

Features
  Fixed Deposit NSC
Liquidity Cannot be used as collateral Against loan, it can be used as collateral
Frequency of compounding Generally, every quarter Annually
TDS Is deducted Not deducted
Rate of Interest Different banks have different FD interest rate which may range between 6 to 8% 7.9% (On Feb 2020)

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FD Vs NSC:

Let us elaborate on the similarities and differences between these two to understand which is better:

  • Tenure / Lock-in Period: As mentioned in the above tables, the tenure of both NSC and FD is the same as 5 years. Therefore, in this respect, one does not have much to select between the two.

  • Rate of Interest: The Indian government fixes the rate of interest for NSC from time to time and it is generally higher than one gets from bank FDs. In February 2020, the NSC was having an interest rate of 7.9% whereas the rate of interest for fixed deposits varies from bank to bank. Currently, the DCB Bank is offering the highest interest rate which is 7.5%, whereas HDFC FD Interest Rates are 6.5% and SBI FD Rates are 6.1%. It is to be noted here that senior citizens get a higher rate of interest on FDs. In the case of NSC, the rate of interest is calculated every half-yearly, whereas for Fixed Deposits of banks it is calculated every quarter. In this way, the actual earning from a bank's fixed deposits can be higher.

  • Taxation: Both FDs and NSCs are eligible for tax deductions of up to Rs. 1, 50, 000 per year. The interest earned in both these investment schemes is also taxable. For National Savings Certificate, the income earned from interest is not eligible for Tax Deduction at Source (TDS). However, the TDS is there for Fixed Deposits of banks at the rate of 10% if the interest paid on all the bank deposits is more than rupees ten thousand in one Financial Year. In this way, if the income tax liability of a person is lower than the Tax Deduction Scheme (TDS), then he/she has to claim a refund at the time of return filing. The interest that is earned from NSC that is invested again is eligible for a deduction of tax u/s 80C up to Rs.1, 50, 000.

  • Maximum and Minimum Amount: For NSCs, one can invest a minimum of Rs.100 and there is no limit on the maximum amount. In this way, NSC is the best scheme for small investors as it allows for much smaller investments. However, for FDs, the minimum and maximum about to be invested depending on the bank, and hence it varies from bank to bank. Since the maximum tax rebate allowed in FDs is Rs.1, 50, 000, thus most of the investors do not put amount more than this for five years. In State Bank of India, the minimum amount that you can deposit is Rs. 1, 000.

  • Risks: As NSC is a scheme backed up by the government of India, it does not have any risk. Even though the risk in a five-year fixed deposit with a well-reputed bank is minimal, but one cannot say it does not exist. However, one should remember that the FDs of up to 5 lakh rupees are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) as per budget 2020.

  • The facility of Loan: NSC can easily be used as collaterals for loans. However, this feature is unavailable for a five-year fixed deposit.

FD interest rates India have fallen consistently over the last 12 years.
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What to Do?

We get the below-mentioned results from the above analysis that can help one to select one out of these two tax saving schemes:

  • Number 1: NSC has two advantages over Fixed Deposits of banks, which are lower risks and a higher rate of interest.

  • Number 2: Because of the re-investment of the TDS amount on the FDs of banks it may be lower than that of NSC irrespective of the fact that the former offers a marginally high rate of interest. Therefore, while comparing these two tax saving instruments for tax saving, you must compare the interest that is yielded on the maturity of FD and NSC both and not just the rate of interest.

  • Number 3: If one is a senior citizen and his/her income is below the taxable limit, then he/she can avail of a higher rate of interest and TDS' non-deduction by submitting Form 15H. Here, many advantages of NSC can be replicated in the FD of the bank.

  • Number 4: If the income of a person is below the taxable limit and he/she has also submitted Form 15G, then these two investment instruments will be on par as far as TDS's non-deduction is taken into consideration. In such a case, one has to look at some other factors that are discussed above, which are the rate of interest and frequency of compounding, etc.

Therefore, you can consider all the above factors at the time of selecting a suitable investment scheme. One should also remember the interest that is earned on FDs and NSCs.

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