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5 Years NSC Vs Post Office Time Deposit: A Tax Saving Comparison For Good Returns

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For tax saving purposes there are a plethora of investment vehicles and considering the same risk-averse investors go for 5-years tax saving FDs first. Even if bank fixed deposits (FDs) with terms of 5 years or more also give tax deductions under section 80C of the Income Tax Act, both NSC (National Savings Certificate) and 5-year POTD (Post Office Time Deposit) are provided by the Post Office can be taken into consideration where the capital deposited in the two schemes is managed by the government and thus provide guaranteed returns along with tax benefits. But taking both into consideration which can be a good bet tax saving purpose. Let's discuss here.

Deposit cap

Deposit cap

The minimum contribution cap is Rs 100 and multiple Rs 100 in both NSC and 5-year POTD. In both schemes, there is no cap to the overall investment. Deposits in these schemes can be made independently, jointly or on behalf of a minor. It is possible to purchase multiple NSCs from a post office. Likewise, in a single post office and/or in different branches, multiple post office time deposit accounts can be opened by the eligible investors.

Rate of interest

Rate of interest

The NSC and 5-year POTD interest rates are determined on a quarterly basis by the government and the NSC interest rate is currently 6.8 percent compounded annually but paid after maturity, whereas the 5-year POTD interest rate is 6.7 percent payable annually but determined on a quarterly basis.

Taxation
 

Taxation

In the fiscal year u/s 80C of the Income Tax Act, although there are no limitations on the amount of maximum contributions, a maximum deduction of up to Rs 1.5 lakh will be eligible from taxable income. Although both schemes are liable for a deduction of 80C, interest is taxable on both schemes. In order to measure tax obligation, the interest payout under the 5-year POTD is credited to overall income revenue. 10% tax is deducted at source (TDS) until paying interest under the 5-year POTD unless the 15G/15H certificate is not submitted. In a fiscal year, senior citizen investors receive a tax exemption of up to Rs 50,000 on interest paid under POTD. The interest on the NSC, on the other side, is taxable on an accrual basis, but the interest still qualifies for a tax benefit u/s 80C. Thus, under the head of Income from Other Sources, the accrual interest is first applied, but also included for deduction purposes under 80C. So, once the existing 80C limit of Rs 1.5 lakh is not exceeded, an investor can reap tax gain on interest on NSC too.

Liquidity

Liquidity

The capital invested in NSC and accrued interest can not be withdrawn until maturity, but an investor may avail for a loan from any bank against NSC at an interest cheaper than the current personal loan interest rate offered by the individual bank. The principal deposited in the 5-year POTD can only be withdrawn after 6 months from the date of opening the account. Interest is due on the Post Office Savings Account, which is actually at 4%, in compliance with the prevailing interest if the withdrawal is rendered after 6 months but before 1 year from the date of the deposit. If the 2, 3 or 5 year TD account is prematurely terminated after 1 year, interest will be measured 2% lower than the TD interest rate (i.e. 1, 2 or 3 years) for the accomplished years and the PO Savings Interest rates will be applied for a period of less than 1 year.

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