This tax season, while you explore tax-efficient investments, let’s compare these two fixed-income investments.
National Savings Certificates (NSC) and fixed deposits (FDs) are among the popular investments that allow tax benefits under Section 80C of the Income Tax Act. Five-year investments up to Rs 1.5 lakh a year are eligible for tax deduction. While these two investments are similar in many ways, there are a few differences. This tax season, while you explore tax-efficient investments, let’s compare these two fixed-income investments.
Similarities between the two
Both these investment instruments are eligible for a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.
NSC comes with a lock-in period of 5 years. Similarly, FD investments are eligible for tax saving when there is a lock-in period of 5 years.
Both NSC and tax-saving FDs do not come with an upper limit on the investment amount.
How is NSC different from tax-saving FD
One major area of difference is the rate of interest associated with the products. In case of NSC, the interest rate is subject to change every quarter whereas the FD rates are changed periodically by banks basis policy/rate changes. NSC offers a common interest rate for all investors. FD interest rates, on the other hand, may vary from bank to bank. The difference between the rates offered by various banks can approximately go up to 100 basis points. Hence, when you pick a tax-saver FD, make sure you have run your research and compared options.
While NSC offers the same interest rate to all investors, irrespective of their age, banks offer a higher interest rate to senior citizens. Usually, banks offer 0.5% additional interest to senior citizens.
The frequency of compounding may vary too, thus impacting the effective return. Banks typically compound the invested amount quarterly while NSCs offer annual compounding. Hence, a bank offering 7.5% interest compounded quarterly, essentially offers an annual rate of 7.71%.
The tax on the FD interest is deductible at source, while that’s not the case for NSC. TDS on FDs is deducted at 10%, if the interest accrued exceeds Rs 10,000 in value in a financial year. However, a person can avoid the tax deduction at source by submitting the 15G form (15H in case of senior citizens). NSC interest, on the other hand, is taxed in the final year, i.e. upon attaining maturity.
Which one should you opt for?
When you compare the two instruments, don’t just look at the interest rate but the interest yielded on the maturity of both. If your income is below the taxable limit and you have submitted Form 15G, in terms of TDS, the two instruments would be on par with each, so the factors you need to look at here are interest rate and compounding frequency.
Let’s look at the table below to get a better understanding of the two instruments:
Another area of difference is the loan facility available. While you can avail a loan against NSC, you can’t do so from a tax-saving FD.
(The writer is CEO, BankBazaar.com)