अब आप न्यूज्ड हिंदी में पढ़ सकते हैं। यहाँ क्लिक करें
Home » Business » NSC vs 5-year bank FD: Which is a better tax saving investment?

NSC vs 5-year bank FD: Which is a better tax saving investment?

By Newsd
Published on :

Among the salaried class people in India, some of the widely preferred tax saving investment are- Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), National Savings Certificate (NSC), tax saving bank fixed deposit (FD).

Section 80C of the Income Tax Act has a list of specified investment products using which people can save up to Rs 1.5 lakh in tax in a financial year. Interest earned on the principal amount invested in taxable and there is no limit on the maximum amount which can be invested in these options.

Most of the tax savings investment are less liquid as compared to other growth-oriented investment options such as equity mutual funds, stocks, gold and normal bank fixed deposit and recurring deposits.

Interest rate differential

The rate of return on NSC is decided by the central government and is subject to revision every quarter. The interest offered on fixed deposits are decided by the respective banks and can change on bank’s decision or on the basis of change in key policy rates by the Reserve Bank of India (RBI).

The current interest rate on fixed deposit of tenure 5 years of SBI and HDFC Bank is 6.85 per cent and 7.25 per cent, respectively. IDFC Bank is offering 8.25 per cent on its tax-saving FDs with quarterly compounding, while the current interest rate on NSC is fixed at 8 per cent.

Compounding frequency

The interest rate on NSC has compounded annually while that on tax saving fixed deposits (FD) is compounded quarterly. SBI tax-saving FD with 6.85 per cent, compounded quarterly, will earn an effective annualised rate of 7.02 per cent whereas, HDFC Bank’s FD will fetch an annualised rate of 7.45 per cent. IDFC bank tax-saving which is currently offering a higher interest rate than NSC will fetch an effective yield of 8.50 per cent. NSC, on the other hand, offers annual compounding, therefore, the effective interest rate remains the same at 8 per cent.

Difference in TDS deduction

Tax deducted at source (TDS) rules are different on NSC and bank fixed deposit (FD). According to the NSC (Viii Issue) Rules, 1989, interest earned on the NSC certificates is not subject to TDS. On the other hand, bank fixed deposits are subject to TDS of 10 per cent if the interest amount earned exceeds Rs 10,000.

Loan against NSC or tax saving fixed deposit (FD)

An individual can’t apply for a loan on the basis of tax saving fixed deposits (FD) of banks while on NSC certificates can be used as collateral to obtain a loan.

TDS deduction also affects how much interest you will receive in the future when the interest accrued is re-invested. In case of bank FD, TDS is first deducted from interest and then the balance is re-invested.

Related