NSC vs Tax saving FD: Which option is better; know here in detail

In individual tax planning, there are several options available to investors. Among these, National Savings Certificate (NSC) and tax saving bank fixed deposits (FD) are the widely preferred by salaried class in India for tax savings purposes. Choosing the tax-saving investment is crucial, otherwise you won’t be able to avail tax exemption under Section 80C of the Income Tax Act. Notably, both NSC and FD have a lock-in period of five years, but they also come with other features. You can avail tax exemption benefit of up to Rs 1.5 lakh under Section 80C of Income Tax Act, but interest earned on the principal amount invested is taxable. Further, there is no limit on the maximum amount that can be invested in these options.

Interest rate on NSC/FD

Very few people are aware of the fact that the central government decides the rate of return on NSC and that this is subject to revision every quarter. Similarly, Centre also decides the revision in interest rates on PPF and Sukanya Samriddhi Accounts, but interest rates on fixed deposits are decided by the respective banks and this can be changed by it in the wake of changes in key policy rates by the Reserve Bank of India (RBI).

Compound interest 

You should know this crucial fact that interest rate on National Savings Certificate is compounded annually, while the same on tax saving fixed deposits (FD) is compounded quarterly. Notably, the current rate of interest on FD of 5 years' tenure or more varies between 6.5 per cent to 7.5 per cent. This depends on banks's policy, while the current interest rate on NSC is fixed at 8 per cent.

Which one is more beneficial 

If you invest Rs 1.5 lakh in NSC, SBI tax saving FD or HDFC's tax saving FD, then after 5 years you earn Rs 2,20,399.21, Rs 2,03,831 and Rs 2,16,930 respectively. According to tax expert Balwant Jain, despite having better interest rate, the actual return from tax saving FD after TDS deduction is less than NSC. Further, you can also take up to 85% loan on mortgaging NSC. Jain, however, suggests that for senior citizens, tax saving FD that offers them a higher interest rate can a be a better option, as they don't have pay tax on annual interest earning of Rs 50,000 on their income. 

Notably, Tax deducted at source (TDS) rules are different for NSC and bank FD. Bank FDs are subject to TDS of 10 per cent if the interest amount exceeds Rs 10,000, while NSC is out of TDS ambit.