Introduction
Now one of the most deciding investments for an will be choosing between the available saving options against tax. Two options that come up are Tax Saving Fixed Deposits (FDs) and National Savings Certificate (NSC). Both these instruments offer tax benefits under Section 80C of the Income Tax Act, but differ in terms of features, returns, liquidity, and risk factors. In this blog, we will dive an-in depth comparison of the two tax-saving instruments so you can make the right choice.
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What is a Tax Saving FD?
A Tax Saving Fixed Deposit is a fixed deposit offered by banks and financial institutions that allows you to save taxes under Section 80C of the Income Tax Act. The main advantage of this FD is that the principal amount invested (up to ₹1.5 lakh) qualifies for tax deduction. However, the interest earned on these FDs is taxable.
Key Features:
- Tax Deduction: You can claim a tax deduction up to ₹1.5 lakh annually under Section 80C.
- Lock-in Period: The lock-in period is 5 years.
- Interest Rate: Typically, the interest rates on tax-saving FDs range from 5% to 7%, depending on the bank and prevailing market conditions.
- Interest Taxation: The interest earned is taxable according to the individual’s tax bracket.
- Liquidity: Premature withdrawals are not allowed before the 5-year maturity period.
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What is a National Savings Certificate (NSC)?
The National Savings Certificate (NSC) is a government-backed saving scheme and it provides tax benefits under Section 80C of the Income Tax Act. The India Post issues the NSC, and it is regarded as one of the safest tax-saving instruments .Usually,individuals seeking a low risk investment backed by the government opt for this certificate.
Key Features:
- Tax Deduction: Like FDs, you can invest up to ₹1.5 lakh and claim tax deductions under Section 80C.
- Lock-in Period: The NSC has a lock-in period of 5 years, similar to tax-saving FDs.
- Interest Rate: The current interest rate on NSC is around 7% per annum (subject to change).
- Interest Taxation: While the interest earned on the NSC is taxable, it is also reinvested and qualifies for a tax deduction under Section 80C.
- Liquidity: Premature withdrawal is not allowed, and the certificate can only be encashed after maturity.
- Safety: Being backed by the government, NSC is a low-risk investment.
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Key Differences Between Tax Saving FD and NSC
| Feature | Tax Saving FD | National Savings Certificate (NSC) |
| Issuer | Banks and Financial Institutions | India Post (Government of India) |
| Interest Rate | 5% to 7% (varies with banks) | Fixed at around 7% p.a. |
| Tax Benefits | Deduction up to ₹1.5 lakh under Section 80C | Deduction up to ₹1.5 lakh under Section 80C |
| Interest Taxation | Taxable according to the individual’s tax bracket | Taxable, but reinvested interest also qualifies for tax deduction under Section 80C |
| Liquidity | No premature withdrawals before 5 years | No premature withdrawals before 5 years |
| Maturity Period | 5 years | 5 years |
| Safety | Moderate (depends on the bank’s stability) | High (Government-backed) |
| Nomination Facility | Available | Available |
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Best Tax Saving Options: FD vs NSC
When comparing Tax Saving FDs and NSC, both options have their merits. Let’s highlight the key points to help you choose the right one for your needs:
- Taxation: If you are looking for the option with reinvestment of interest for tax-saving purposes, NSC is the better option. However, if you prefer regular interest payouts, Tax Saving FD is ideal for you.
- Safety: Both instruments are safe, but NSC has the advantage of being backed by the government, making it slightly more secure than a Tax Saving FD, which depends on the stability of the issuing bank.
- Interest Rate: If you are looking for a higher interest rate, you might find a Tax Saving FD with an attractive interest rate depending on the bank. However, NSC offers a fixed and reliable rate, typically around 7%.
- Liquidity: Both options have the same lock-in period of 5 years, but Tax Saving FDs are more flexible in terms of interest payout frequency (monthly/quarterly), while NSC offers no such option.
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Pros and Cons of Tax Saving FD and NSC
Tax Saving FD:
Pros:
- You can choose between monthly, quarterly, or yearly payouts.
- Banks offer better customer support and access to online banking.
- Potentially higher returns depending on the bank’s interest rates.
Cons:
- Interest is taxable as income, which reduces the effective returns.
- Premature withdrawal is not allowed before 5 years.
NSC:
Pros:
- Backed by the government, making it a low-risk investment.
- Interest is reinvested, providing compound growth and further tax benefits.
- Suitable for long-term investors seeking security and guaranteed returns.
Cons:
- Limited liquidity, as premature withdrawal is not possible.
- The interest rate is fixed and does not change with market conditions.
Conclusion: Which One Should You Choose?
Both Tax Saving Fixed Deposits and National Savings Certificates are excellent options for tax savings under Section 80C. If you are seeking flexibility and prefer regular interest payouts, a Tax Saving FD might be more suitable for you. On the other hand, if you prioritize safety and are looking for a low-risk, government-backed investment, NSC could be your best choice. Ultimately, the right choice will depend on your financial goals, risk tolerance, and investment preferences.
