Before we see what the 5-year Tax Saving Bank Fixed Deposit and NSC have to offer, let us look at the most unique feature of these two investments.
With less than 60 days left to save tax for the financial year 2018-19, there are several taxpayers who may still be looking for the right tax saver. For those looking to stick to a fixed income tax saving investment, the 5-year Tax Saving Bank Fixed Deposit and National Savings Certificates (NSC) are two such tax savers that many opt for.
Before we see what they have to offer, let us look at the most unique feature of these two investments.
While the 5-year Tax Saving Bank Fixed Deposit is the only tax saving investment that comes with section 80C benefit and allows fixed interest to be received either monthly or quarterly, the unique feature in NSC is that the interest accrued annually is deemed to be reinvested ( for initial four years) under Section 80C of the I-T Act. In other words, interest of each year qualifies for tax benefit as well.
5-year tax saving bank fixed deposit
The investment in 5-year tax saving bank fixed deposit can be made in any bank be it private, public sector or in even the Small Finance banks. To open such tax saving FD, one may either visit the bank branch where one holds an account or can even open it online through net banking. The deposit may even be transferred from the issuing branch to another branch but are not transferable from one bank to another bank.
If one is hard-pressed for time and wish to avail section 80C is quick-time, the 5-year bank fixed deposit may come handy. Through the online mode, the investment goes through immediately and the certificate is generated instantaneously to let one avail tax benefit on the same. For online investment, make sure your PAN is linked to your savings account. At the end of the lock-in period, the maturity proceeds are directly sent to one’s savings account.
Banks also have the regular 5-year FD, therefore, for tax benefit make sure to inform the bank and fill the relevant application form accordingly.
The maximum that one may invest in one FY is Rs 1.5 lakh. One may opt for either monthly or quarterly interest payouts or may even opt for the cumulative option in which case the interest is paid together with the principal at the end of the maturity. The deposit may be made in joint name, the tax benefit, however, can be availed only by the first holder in whose name the investment is made.
The tenure in these deposits is minimum of 5 years and may go up to 10 years. As per the rules, such deposits do not allow any partial or premature withdrawal and hence the lock-in is 5 years from the date of deposit. Further, such deposits do not allow any loan facility.
In case of banks, the interest rate on 5-year tax saving bank fixed deposit varies from 6.5 per cent to 8.25 percent (See table below).
Post office NSC
The tenure and the tax benefit is the same in both of them. However, unlike 5-year tax saving bank fixed deposit, there is no interest payouts in NSC. The interest earned can be had only on maturity. Currently, interest rate on NSC is 8 percent compounded annually ( till march 31, 2019) but payable at maturity.
On a deposit of Rs 100, the maturity value is Rs 146.9 3 after 5 years. The interest rate of banks may change anytime but in case of post office schemes including NSC, the rates are set by government at the start of each quarter of the FY. However, once invested in either of these two tax savers, the rate remains fixed for the entire tenure.
Post tax return
Although there is tax benefit on the investment made in both of these tax savers, the interest earned is fully taxable in them and have to be added to the income head ‘ Income from other sources’, in the year when the interest gets accrued. Thereafter, it is liable to be taxed as per one’s income slab.
The post tax return of 8 percent for those paying 5.20 per cent, 20.8 per cent and 31.2 per cent is 7.6 per cent, 6.3 per cent and 5.50 per cent respectively. “Post tax and inflation, return could be negative. Hence, tax saving FDs may not be the best choice. In fixed income category, PPF is a better option and in equity category, ELSS would be a better tax -inflation adjusted option”, says Amar Pandit, CFA, Founder of HappynessFactory.in
In case of bank deposits, the current limit for TDS stands at Rs 10,000 a year ( proposed to be hiked to Rs 40,000 in Budget 2019), there is no incidence of TDS in post office schemes including NSC.
What to do
Do not base your investment decision merely looking at the nominal rate of interest of these two investments. In NSC, the compounding is annual while in bank FD, its quarterly. To equate NSC’s 8 percent per annum return, a bank FD with 7.75 percent per annum matches the maturity value that of NSC. It means any FD above 7.75 percent per annum under cumulative option is better then 8 percent per annum of NSC.
Fixed income tax savers suit ultra conservative investors and therefore consider them after looking at your income tax slab as post tax return is low in them. “Any one investing for tax savings must consider that tax saving option should have a dual advantage. It should save tax every year and additionally, it should create wealth in the long run. In short the goal of tax planning is not just to save taxes but to increase post tax income,” informs Pandit. Fixed income investments such as FDs and NSC are tools to conserve one’s wealth and not act as a wealth creation vehicle.