When planning your savings, two popular investment options often come up: National Savings Certificate (NSC) and Fixed Deposits (FDs). Both provide safety, guaranteed returns, and tax-saving benefits, making them ideal choices for risk-averse investors. However, the right option for you depends on your financial goals, investment horizon, and tax considerations. This guide will help you understand the key features, advantages, and differences between NSC and FDs so you can make an informed decision.
What is the National Savings Certificate (NSC)?
The National Savings Certificate (NSC) is a government-backed fixed-income savings scheme offered by post offices. It comes with a lock-in period of 5 years and provides tax benefits under Section 80C of the Income Tax Act.
Key Features of NSC
Minimum Investment: ₹100
Maximum Investment: No upper limit
Interest Rate: 6.8% p.a. (compounded annually)
Tenure: 5 years
Tax Benefits: Principal and accrued interest qualify for a deduction under Section 80C, up to ₹1.5 lakh per year.
Who Can Invest?
Only Indian residents are eligible to invest in NSC.
NRIs cannot purchase a new NSC but can hold existing ones until maturity.
Advantages of NSC
Low Risk: Backed by the Government of India, NSC is a secure investment.
Tax Savings: Both the invested amount and the accrued interest qualify for Section 80C deductions.
Ease of Investment: You can purchase NSC from any post office by submitting basic KYC documents.
Collateral for Loans: NSC can be pledged to secure loans from banks or financial institutions.
Limitations of NSC
No Online Access: Most post offices still lack online facilities for purchasing NSC.
Fixed Tenure: NSC has a mandatory lock-in period of 5 years. Premature withdrawal is allowed only under exceptional circumstances.
Limited Returns: NSC offers a fixed interest rate, which might not keep up with inflation.
What is a Fixed Deposit (FD)?
A Fixed Deposit (FD) is a savings product offered by banks and non-banking financial companies (NBFCs). Investors deposit a lump sum amount for a fixed period and earn interest on it. Like NSC, there is a tax-saving FD option that qualifies for deductions under Section 80C.
Key Features of FD
Minimum Investment: ₹1,000 (varies by bank)
Maximum Investment: No upper limit
Interest Rate: 6%–8% p.a. (varies by bank and tenure)
Tenure: 7 days to 10 years (Tax-saving FDs have a fixed tenure of 5 years)
Tax Benefits: Principal qualifies for Section 80C deductions, up to ₹1.5 lakh per year.
Flexibility:
FDs are available in two modes:
Cumulative FDs: Interest is reinvested and paid at maturity.
Non-Cumulative FDs: Interest is paid out monthly, quarterly, half-yearly, or annually.
Advantages of FD
Flexible Tenure: You can choose an FD tenure ranging from 7 days to 10 years.
Higher Returns: FDs generally offer better returns than savings accounts.
Ease of Access: FDs are available online through internet banking, making them convenient to manage.
Renewal Options: Most banks offer auto-renewal for FDs.
Limitations of FD
Taxable Interest: The interest earned on FDs is taxable under your income tax slab, reducing the effective returns.
TDS Deduction: If the annual interest exceeds ₹40,000 (₹50,000 for senior citizens), banks deduct 10% TDS.
Inflation Impact: FDs offer fixed returns, which may not always beat inflation.
NSC vs FD: Key Differences
Parameter | NSC | FD |
Tenure | Fixed at 5 years | 7 days to 10 years (5 years for tax-saving FD) |
Interest Rate | 6.8% p.a. (compounded annually) | 6%–8% p.a. (varies by bank; compounded quarterly) |
Tax Benefits | Principal + interest (up to ₹1.5 lakh) | Principal only (up to ₹1.5 lakh) |
TDS | Not applicable | 10% TDS on interest above ₹40,000 (₹50,000 for seniors) |
Premature Withdrawal | Allowed only under specific conditions | Allowed with penalties (not for tax-saving FDs) |
Collateral for Loans | Can be used as collateral | Tax-saving FDs cannot be used as collateral |
Investment Limit | ₹100 minimum; no upper limit | Minimum varies; no upper limit |
Which Should You Choose: NSC or FD?
Your choice between NSC and FD depends on your financial objectives and priorities:
When to Choose NSC
If you are looking for higher tax benefits, as NSC allows deductions for both the principal and accrued interest under Section 80C.
If you prefer a government-backed scheme with minimal risk.
If you’re okay with a lock-in period and do not need liquidity.
When to Choose FD
If you want flexible tenures to align with short-term or long-term goals.
If you need liquidity, as FDs (except tax-saving ones) allow premature withdrawals.
If you are a senior citizen seeking higher interest rates, as banks often provide an additional 0.25%–0.75% interest.
Taxation: A Critical Factor
NSC: No TDS on interest. However, accrued interest must be declared as income and is eligible for further deduction under Section 80C.
FD: TDS is deducted on interest if it exceeds ₹40,000 (₹50,000 for seniors). This reduces the post-tax return unless Form 15G/H is submitted.
Conclusion
Both NSC and FD are secure, low-risk investment options, but they serve different purposes. NSC is ideal for investors seeking long-term growth with tax benefits and can tolerate limited liquidity. On the other hand, FDs offer more flexibility in tenure and payout options, making them suitable for short-term goals and emergency funds.
To decide, consider factors like your financial goals, tax liabilities, and the need for liquidity. Ideally, include both options in your investment portfolio for a balanced mix of safety, returns, and tax efficiency.
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