India has a fair share of safe investment options in the market that also come with tax benefits. If you are a conservative investor wanting to lock away your money for a period of 5 years to gain reasonable returns as well as to save tax, the National Savings Certificate (NSC VIII issue) and 5-year (tax saving) fixed deposits are both good options. But if you had to pick one, look at their pros and cons below so as to make an informed decision.
Similarities between NSC and 5-year FD
- Both the investment vehicles are debt-oriented options, which means, you will get a fixed interest that will be promised to you before you invest in it.
- They are safe. While NSC is backed by the Indian government and FD in a Nationalised or a recognized private bank are risk-free.
- These are issued at post offices and nationalized banks. While Fds can be availed at private and small finance banks as well, the 5-year tax saving one is mainly a part of the Indian postal savings system, available also at leading banks.
- Tax exemption up to Rs 1.5 lakh under section 80C (along with other expenditures under this section) is eligible for both the instruments.
- Both come with a lock-in period of 5 years.
- There is no limit on the maximum amount that can be invested.
- Interest income earned is taxable under 'income from other sources' as per Income Tax rules.
- Re-investment of interest earned
The 5-year FD comes with a cumulative and a non-cumulative option. In the non-cumulative method, the monthly interest earned is paid to the investor and, in case of cumulative, it is reinvested in the FD.
In the case of NSC, the interest earned is reinvested (cumulative method) and there is no option to get it paid to you until maturity. While interest earned from both the instruments is taxable as per income tax law (under the head 'income from other sources'), the interest earned in NSC (for the first four years) is eligible for tax benefit under section 80C. This benefit is cannot be enjoyed in a 5-year FD.
- Interest Rates
Interest to be earned on NSC is revised by the government every quarter (currently 7.6 percent). The interest rate offered by banks varies from institution to institution. You have the option to pick the bank of your choice offering the best rate.
Most of us only look at the interest rates offered and ignore the frequency of compounding adopted by the institution. NSC compounds the interest earned annually while most banks do it quarterly. The 'magic of compounding' helps you earn more when it is more frequently compounded because it increases your base amount and means higher interest amount earned.
There is no TDS (tax deducted at source) on the interest earned on NSC certificates. However, in the case of bank FD, TDS at the rate of 10 percent is deducted when interest earned or accrued is over Rs 10,000 per financial year. This limit is specific to each bank and not branch. Also, those investors that fail to provide their PAN details to the bank will be liable to pay 20 percent as TDS.
You have the option to submit form 15G to avoid TDS deduction.
Based on how much you decide to invest, TDS could hurt your maturity value as the interest amount that would be reinvested will be lower despite the higher interest rate.
As per the rules of the Bank Term Deposit Scheme, 2006, one cannot use an FD as security to obtain loans. NSC VIII issue, on the other hand, can be used to seek a loan from the following specified entities:
- The President of India or Governor of a State in his official capacity;
- The Reserve Bank of India or a scheduled bank or a co-operative society including a co-operative bank
- A corporation or a government company
- A local authority; and
- A housing finance approved by the National Housing Bank and notified by the Central Government.
With the above similarities and differences, you can judge that an NSC-VIII issue could fetch better returns on maturity due to a higher interest rate when compared to 5-year tax saving FD and, comes with better tax benefits.
However, the choice of investment also depends on whether your need is long term or not. For example, if you are a senior citizen, you can earn monthly income during your retirement from the monthly non-cumulative interest payments made on 5-year Fds. Banks also offer higher interest rates to senior citizens.