National Savings Certificate (NSC) and 5-year fixed deposit (FD) are two popular investment options for risk-averse investors looking for tax savings with a short investment horizon. While NSC is a savings scheme recognised and validated by the government, fixed deposits are instruments offered by both private and public sector banks, post office and even by other non-banking financial institutions.
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Both these investment schemes allow investors to claim deductions of a maximum of Rs 1.5 lakh under Section 80C of the Income Tax Act.
In view of this, let’s take a look at how these two schemes compare against each other: Interest rates
Currently, the interest rate on NSC is 6.8 percent annually compared to 5-year bank FDs wherein the interest rates may vary from 4.5 percent to 7 percent based on the different banks.
Ideally safer PSU banks provide low-interest rates in the range of 5.2—5.4 percent.
According to Vijay Kuppa, Co-Founder, Orowealth,
FD rates may not rise in the near future, considering the current pandemic.
"This means interest rate gap between NSC and FD is here to stay in the short term,” he adds.
Considering NSC is government-backed, it provides additional safety when compared to banks which may require a bailout in case of bankruptcy, according to Kuppa.
While both NSC and
5-year FDs offer tax benefits under the 80C mechanism, from a pure tax perspective, NSC is a better option, according to Siddharth Panjwani, Chief Strategy Officer—Pickright Technologies, since the interest paid by NSC is re-invested for the first 4 years and this interest paid is eligible for tax benefit under 80C.
"If the 80C benefit is not availed for NSC interest, then it is taxable. The interest earned by a 5-year FD is taxable to the investor. TDS is also not deducted for interest earned on NSC whereas it is deducted for a tax saver 5-year FD. Due to this TDS, the amount re-invested in an FD would be lower than that of NSC," Panjwani explains.
In NSC, there is the unavailability of premature withdrawal before the tenure of 5 or 10 years gets completed. NSC can only be withdrawn prematurely on the death of the holder, on forfeiture of the scheme by some gazette government officer or when the withdrawal is ordered by a court of law.
On the other hand, premature withdrawal of fixed deposits is allowed by almost all banks. This pre-closure, however, is charged a specific pre-mature withdrawal fee which depends upon the bank, according to Bankbazaar.
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