National Savings Certificate vs. 5-year bank FD: Which is a Better Tax-saving Investment?

March 14, 2018 | Author: | Posted in Finance

Five-year bank fixed deposits and National Savings Certificate are both very similar in nature, and are often compared to each other. They are both safe investment options that require you to lock in your investment for 5 years. They also offer tax benefits under Section 80C up to Rs.1.5 lakh on the invested amount. However, there are certain tax nuances that will help you choose between the two.

Here are some areas where tax rules differ between National Savings Certificate and 5-year bank fixed deposits.

Re-Investment Benefits

The returns from fixed deposits and NSC are taxable under section 80C under the category of ‘Income from other sources.’ However, since the interest on NSC is reinvested rather than paid out to you, it is eligible for tax deduction. To get this benefit, you need to declare the accrued interest as ‘Income from other sources’ and then claim the deduction up to Rs.1.5 lakh. However, you can only claim this for 4 years out of the 5 years you invest with NSC, since in the last year, the interest is paid out to you and not reinvested.

Interest Rate and Compounded Earnings

The interest rate for bank fixed deposits ranges from 6-7% and a little higher for senior citizens. The rate of return for a National Savings Certificate goes up to 7.6%. However, for NSC, the interest is compounded annually. When it comes to FDs, the interest is compounded quarterly. So, although NSC offers a higher interest compared to bank FDs, bank FDs may give you more earnings due to more frequent compounding.

TDS Rules:

FDs feature TDS or tax deducted at source at 10% if your interest earnings cross Rs.10,000 in a financial year. If the bank doesn’t have your PAN card details, it increases to 20%. To get your refund, you will need to file a claim in your IT returns even if your interest doesn’t cross the limit. There is no TDS on NSC. This TDS affects the amount of earnings you get with compounded interest on FDs. For example, if you invest Rs.1.5 lakh with a 5-year bank FD at 6% interest and the same sum in NSC at 7.6%, you will get fewer earnings on your FD at Rs.1.98 lakh compared to NSC at Rs.2.16 because of the TDS applicable on your FD.

These are the three areas where taxation rules differ between National Savings Certificate and fixed deposits. So, before you decide, closely compare these benefits between the two options and choose what best matches your requirements.

One option you can consider to maximise your earnings is a company FD because you will get higher FD Interest Rates. Bajaj Finance FDs, for example, offer interest from 7.85% to 8.20%. So, invest your savings in a cumulative or non-cumulative company FD and utilise other tax-savings schemes to get deductions. Whatever you decide to do, ensure that you know the ins and outs of tax before making an investment decision.


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About Author
Rahul is working in the domain of Investment management in one of the top universities. He has published research papers and case studies in Investment marketplace. He is an avid blogger in the domain of Investment management. you can also find him on social networking platforms


Financial consultant in India

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