When you invest to save tax under Section 80C of the Income Tax Act, you have several choices, among them are National Savings Certificates (NSC) and five-year tax-saving deposits in banks. Both are similar in that they have a tenure of five years each. But are they the same? Let’s take a look at the similarities and differences between the two.
Tenure
As we have mentioned above, the tenure for both NSC and five-year deposits are the same at five years, so in that respect, there is very little to choose between the two.
Interest rates
Interest rates on NSC are fixed by the government from time to time and are generally higher than those on bank fixed deposits. At the time of writing (February 2020), the interest rate on NSC was at 7.9 per cent. Interest rates on five-year deposits vary from bank to bank, with DCB Bank offering the highest rate of 7.5 per cent. HDFC Bank offers 6.5 per cent, while the State Bank of India rate is 6.1 per cent. Note that senior citizens get higher rates of interest.
Interest rates are calculated on a half-yearly basis in the case of NSC, while bank deposits are calculated on a quarterly basis. So the actual interest earnings from five-year bank deposits could be higher.
Taxation
Both NSC and five-year bank fixed deposits are eligible for deduction from taxable income up to Rs. 1.5 lakh a year. Interest income earned is taxable for both schemes.
Interest income is not subject to tax deduction at source (TDS) in the case of NSC. There is, however, TDS on bank fixed deposits at 10 per cent if interest paid out from all deposits in the bank is more than Rs. 10,000 in a financial year. So if your income tax liability is lower than the TDS, you will have to claim a refund while filing your income tax returns.
Interest earnings from NSC that are reinvested are eligible for tax deduction under Section 80C up to a maximum of Rs. 1.5 lakh.
Minimum and maximum amounts
In the case of NSC, you can invest a minimum of Rs. 100 and there’s no maximum limit. Since such small amounts can be invested, this is a good deal for smaller investors. The minimum and maximum investment in bank fixed deposits will vary from bank to bank. Since the maximum tax benefit is Rs. 1.5 lakh, it’s unlikely that investors will put more than that in a five-year FD. The minimum deposit in SBI is Rs. 1,000.
Loan facility
NSC can be used as collateral for loans. However, this facility is not available for five-year FDs.
Risk
Since NSC is a government-backed scheme, it is free from risk. Though the risks involved in the five-year FDs of reputed banks is minimal, you cannot say that they don’t exist. However, you must remember that deposits of up to Rs. 5 lakh are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), as announced in the Budget for 2020.
So NSC has two clear advantages over bank fixed deposits – higher interest rates and lower risk.
