NSC vs FD: Which is better investment option for fixed amount returns and why?

For most people, investments have always been tricky. This is largely because of the lack of knowledge as well as the urge to get quick returns. Traditionally, Indians have been conservative investors, often opting for lesser but guaranteed returns instead of parking money in aggressive schemes. These also have the benefit of providing safety for investors. The National Savings Certificate (NSC) or Fixed Deposits (FDs) have been popular instruments among investors for this very reason. Both these schemes offer guaranteed returns which takes the risk factor out of equation. Also, both the schemes allow you to take loan against them. With similar features, it could be tough to choose between the two. However, before making the choice, you need to understand them better. 

What are National Savings Certificates (NSC)?

This is a fixed income investment scheme that you can open with any post office. The NSC is a savings bond floated by the Government of India that encourages subscribers to invest while saving on income tax. It caters mostly to small to mid-income investors. Just like Public Provident Fund and Post Office FDs, this is also a secure and low-risk product. 

The NSC comes with two fixed maturity periods - 5 years and 10 years. You can purchase NSCs of as much value as you want but only investments of up to Rs 1.5 lakh can earn you a tax break under Section 80C of the Income Tax Act. The certificates earn a fixed interest, which is currently at a rate of 8% per annum.  

What are Fixed Deposits (FDs)?

Fixed Deposit (FDs) or Term Deposits are the prime investment products offered by banks & Non-Banking Financial Companies. FDs allow you to park surplus funds within a financial institution for a fixed tenure and interest income. The tenure of an FD and interest earned on its varies from bank to bank. However, the tax benefit claimed under it could be up to Rs 1.5 lakh under Section 80C of the Income Tax Act. 

Which is better investment option?

Ketan Shah, Director & Chief Revenue Officer, Angel Broking Ltd told that returns on both NSC as well as FDs have come down over the years. This is why more and more investors are turning towards other investment schemes like mutual funds. But, both the schemes can give you desired returns even now. 

"However, if you are looking at regular income then FDs are a better option. That is because interest on NSC is not paid each year but only accrued," Shah told Zee Business Online, while adding that you still need to pay tax on this accrued interest each year. 

"Both long term FDs and NSC are locked in. While normal FDs can be broken after paying a small penalty, investments in NSC cannot. One can also take loans against NSC but it comes with a minimum lock in of either 5 years or 10 years and currently pays interest at 8%," he said.