FD OR NSC: WHICH ONE TO OPT FOR?
Fixed Deposit (FD) and National Savings Certificates (NSC) are both popular investment choices that offer tax benefits under the Income Tax Act. Investments up to Rs. 1.5 lakhs for five years are applicable for tax deductions. They are both types of deposits offering fixed-income investments and have some similarities. On the other hand, they also do have their fair share of differences. It is necessary to explore the same to realize which one is more beneficial for the investor.
As previously mentioned, both of these investment alternatives have the option of tax deduction up to Rs. 1.5 lakhs. This provision is provided under Section 80C of the Income Tax Act. Moreover, both of these also have a similar locked in tenure of five years. Similarly, both the National Saving Certificate and tax-efficient Fixed Deposits come without any upper limit when it comes to the topic of the sum of investment.
- Interest Rate:
The first noticeable difference is the interest rate linked with products. When it comes to NSC, the rate of interest changes each quarter, while interest rates for FD are switched by the bank based on the changes in rates/policies. The NSC rate is common for every investor while fixed deposit rates can differ from bank to bank. It is for this reason that it is necessary to compare your options when opting for a tax-efficient FD to find the best FD rates. NSC offers a common rate of interest to every investor regardless of their age while FD has the provision of a higher rate of interest for senior citizens, up to 0.5%.
For the obtainment of loan, NSC can be used as security. On the contrary, Bank Term Deposit Rules stipulate that a tax-efficient FD cannot be used as collateral for getting a loan.
- Compounded Interest:
The compounding frequency can impact the effective return. Generally, banks compound the sum invested while NSCs provide yearly compounding. Thus, when a bank quarterly provides 7.5% compounded interest, it is providing a 7.71% rate annually.
- Tax Deduction:
When it comes to fixed deposit rates, it is from source that the tax is deductible, which is not the same for an NSC. Tax deductibles for FDs are at 10% if accrued interest is higher than Rs. 10,000, although this deduction can be avoided by filling the 15G form. For NSC, however, the interest is accumulated only upon after the attaining of maturity.
Factors for Choosing the Right Alternative for the Investor
When comparing tax-efficient Fixed Deposits and National Savings Certificates, it is essential to not simply compare the rate of interest but also the interest accumulated upon their maturity. If the investor’s income is inferior to taxable limit and the 15G form has been submitted, both the FD and NSC are equal in terms of tax deductions. In this case, the factors to be considered are the frequency of compounding and the rate of interest to reach the right decision.