Whether you’re looking to safely tread the stock market through mutual funds, or buy into a market-immune fixed interest scheme, there is no shortage of options or issuers to choose from. Among the various factors that will inform your decision such as the amount you’re looking to invest, how long you’d like to invest, and at what frequency you’d like your interest to be paid out, you should also consider the tax benefits that certain schemes will offer you.
Take, for example, the National Savings Certificate, which is issued at post offices and nationalised banks, and is tax deductible under Section 80C of the Income Tax Act. NSCs are a great, accessible way for you to invest in a fixed-interest investment scheme that offers you stable returns. Alternatively, tax-saving fixed deposits offer you fixed interest as well, in addition to the flexibility of a monthly payout option. If you’re looking to invest in either one or both of these tax saving schemes, here’s what you need to know.
The similarities between NSCs and FDs
NSCs and tax-saving FDs are a lot more similar than you may think. Firstly, they’re both offered at post offices and nationalised banks—although FDs are additionally also available through private issuers. Secondly, both are offered for a minimum term of 5 years and are risk-proof investments that offer interest at a fixed rate until maturity. Neither has a limit on the amount that can be invested and investments up to Rs. 1.5 lakhs on both are eligible for tax deduction under Section 80C Income Tax Act.
FDs offer a more flexible payout
While both NSCs and FDs have a minimum lock-in term of 5 years, only FDs offer you the option for a non-cumulative payout plan, meaning you can opt to have your interest paid out on a monthly basis. NSCs, on the other hand, are untouchable until they reach maturity. If you’re looking for a regular income, comparing NSC vs FD will thus show you that FDs are a better option.
Interest rates are more stable on NSCs
The interest rates on NSCs are revised every quarter and are decided by the central government, which means that they are standard across the board. The interest rate on FDs, on the other hand, is decided by individual issuers, and changes based on a range of factors at the discretion of the issuer. Moreover, NSCs offer the same interest rate to all account holders, irrespective of age or investment history, whereas many FDs offer senior citizens a better rate of interest, and also offer higher interest rates to customers who choose to reinvest upon maturity. In such cases, when considering NSC vs FD, look at the current interest rate offered. At the moment, you can earn 8% from NSC and from 6.25% to 8.25% on tax-saving FDs.
Interest in FD is compounded more frequently
The interest on FDs is usually compounded every quarter, which means that the amount on which you receive interest increases every quarter. For example, an FD that offers an interest rate of 6.85% compounded quarterly, would earn interest at the effective annualised rate of 7.02%. NSCs, on the other hand, only compound interest at the end of every year, so the effective interest rate remains the same as the interest offered.
No TDS on NSCs
One of the primary benefits NSCs have over FDs is that no TDS is levied on interest accrued. In the case of tax-saving FDs, TDS will be levied on interest that exceeds the Rs.40,000 threshold stipulated by the Interim Budget of 2019—and this is over and above all other income tax charges. This cap is Rs.50,000 for senior citizens. When you take TDS into account, an NSC offering the same interest rate as an FD will yield higher returns.
NSCs can be used as collateral for loans
NSCs can be offered as collateral for loans. This can prove to be a great option when you are looking for a short-term loan, or need some extra cash but don’t want to dip into a savings account. While most FDs also allow you this benefit, tax-saving 5-year FDs do not. For example, the Bajaj Finance FD, which offers interest rates up to 9.10% for senior citizens who invest for at least 36 months with payout at maturity, allows you to take a loan against your FD.
There are various benefits to both NSCs and FDs. Depending on how flexible you’d like your investment to be, and how steadily you’d like it to mature, either one or both could work to your advantage. If you are looking for a fixed deposit option that is more flexible than the 5-year tax-saving scheme, with competitive interest rates and special rates for seniors, the Bajaj Finance FD is a great place to start.