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5-Year NSC vs 5-Year Tax Saving FDs: A Comparison In The Context Of Tax Gain & Returns


Tax-saving fixed deposits (FDs) are one of the investment strategies that count for Section 80C tax deductions. A tax-saver FD has a 5-year maturity period with no premature withdrawal option. A tax-saver FD has a 5-year maturity period. Premature withdrawals are not permitted in tax-deferred savings accounts. The 5-year National Savings Certificate (NSC) from the post office, on the other hand, comes with an income tax exemption. Bank interest rates can fluctuate at any time, but NSC rates are regulated by the government which makes it one of the most favoured tax-saving investments under section 80C. As both tax-saving schemes come with a lock-in period of 5 years let's compare the both to make you choose the best for your personal finance.


5-Year National Savings Certificate

5-Year National Savings Certificate

National Savings Certificates (NSC) comes with a range of benefits. Some of them are as follows:

Rate of interest: The interest rate on NSC is currently 6.8% per annum, and it is updated quarterly by the government of India. The returns are much higher if we compare the interest rate of NSC with tax-saving FDs of SBI, ICICI, HDFC and Axis Bank.

Safety: Since NSC is backed by the government, it offers greater security than banks, which may go to bankruptcy in the potential.

Tax benefits: NSC, on the other hand, has a feature that no other fixed-income tax-saving fund has. Under Section 80C of the IT Act, interest earned annually in NSC is considered to be reinvested (for the first four years). In other terms, interest counts for a tax gain per annum up to a limit of Rs 1.5 lakh.

Premature withdrawal: In the NSC, there is no option for early withdrawal before the 5- or 10-year period is finished. NSCs can only be withdrawn early if the holder dies.

Loan against deposit facility: If you need a loan, you can use National Saving Certificates (NSC) as security. This alternative is ideal since the interest charged on loans secured by NSCs is far lower than that charged on personal loans.

Deposit limit: One can purchase NSC from any post office by depositing a minimum amount of Rs 1000 and in multiple of Rs. 100, with no upper limit.

5-year Tax Saving FDs

5-year Tax Saving FDs

You can choose either a private, public, or Small Finance Bank to get tax benefits by investing in a 5-year tax-saving fixed deposit. To learn more about tax-saving FDs, look through the details below.

Rate of interest: Interest rates on tax-saving FDs vary from bank to bank and type of depositor i.e. non-senior or senior citizen. The latest rates on tax-saving FDs are as high as 7.25 percent, which is higher than the interest rate on bank savings accounts. To know more about tax-saving FD rates, click here.

Safety: Tax saving FDs which allow tax deductions are also risk-free which means that the returns are not market-based. The amount invested is fully secured and even returns are promised.

Deposit limit: One can make deposits in tax-saving FDs with a small amount which varies from bank to bank. The maximum amount that can be invested in a financial year is set at Rs. 1.5 lakh, which is also the limit for tax-saving contributions under section 80C of the Income Tax Act.

Loan and premature withdrawal option: Premature withdrawals and loan against deposit under tax-saving deposits are not allowed.

Nomination: These FDs have a nomination facility. That being said, if the deposit is made for and maintained by or on behalf of a minor, the nomination facility is not open.

Benefit for senior citizens: Most of the banks provide senior citizens somewhat higher interest rates on Fixed Deposits compared to non-senior citizens. This interest rate gap also continues for tax-saving FDs. Senior citizens, on the other hand, are not liable for higher tax-saving FD interest rates at the post office.

TDS: Individuals must pay TDS if their gross interest received in a financial year surpasses Rs 40,000. Section 80TTB allows senior citizens to claim a deduction of up to Rs 50,000 on interest received on deposits. TDS is deducted from the interest received based on the investor's tax slab rate. By submitting Form 15G to the bank (or Form 15H for senior citizens) to the bank one can avoid TDS.

10 Best Tax-Saving FDs

10 Best Tax-Saving FDs

Below are the top 10 banks including (small finance, public sector and private sector) which are currently providing higher returns on 5-year tax-saving fixed deposits: 

Sr No.BanksROI in % for non-senior citizensROI in % for senior citizens
1Suryoday Small Finance Bank7.257.75
2Jana Small Finance Bank77.5
3Utkarsh Small Finance Bank6.757.25
4Ujjivan Small Finance Bank6.757.25
5DCB Bank6.757.25
6IndusInd Bank6.57
7RBL Bank6.256.75
8AU Small Finance Bank6.257
9Union Bank of India5.556.05
10Canara Bank5.56
Our take

Our take

For the financially savvy, investment as a means of creating wealth is often a lucrative concept. Although both fixed deposits and NSCs have positive investment prospects, NSCs are the clear first choice because of the higher and more stable returns they offer than what offered currently provided by some small finance banks as per the above table. Compounding is undertaken on an annual basis in NSCs and quarterly in bank FDs which is worth considering here apart from the returns only. Both are fixed-income instruments that allow tax deductions under section 80C, which means that both can be a perfect bet for a conservative or risk-averse investor. Fixed income instruments, such as FDs and NSC, are strategies for wealth generation and do not serve in the long run to achieve inflation-beating returns as NPS and ELSS do. Hence, it can be a smart move if you only after considering your income slab diversify your holdings across NSC and Tax-saving FDs to meet your potential goals on the go.  

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