National Savings Certificate vs Bank Fixed Deposits: For tax-saving investments, National Savings Certificate (NSC) and bank tax-saving Fixed Deposits (FDs) stand out as preferred choices. These instruments guarantee returns, offer tax advantages under Section 80C, and require a five-year lock-in. Their differences lie in interest computation, rates and taxation structures, which determine the final returns.
National Savings Certificate (NSC)
The National Savings Certificate is a government-backed savings programme that ensures secure returns and provides tax advantages. It features a fixed five-year tenure, specifically created to promote sustained savings habits.
NSC Vs FDs interest rates
During January to March 2025, NSC delivers 7.7% annual interest, with yearly compounding. According to an ET report, leading banks’ tax-saving FDs yield between 6.5% and 7.5% annually. HDFC Bank and ICICI Bank currently maintain 7% interest on tax-saving deposits. SBI and PNB provide 6.5%, whilst DCB Bank offers 8%. IndusInd Bank and Yes Bank provide 7.25%, and Utkarsh Bank extends 7.50%.
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TDS: NSC vs FDs
In case of NSC investments, there is no requirement of Tax Deduction at Source (TDS). On the other hand, in the case of FDs if the yearly interest surpasses Rs 40,000 for regular citizens and Rs 50,000 for senior citizens in the current financial year, there is TDS. From the next financial year, this limit is Rs 50,000 for regular citizens and Rs 1 lakh for senior citizens.
NSC Vs FDs: Interest Calculation
NSCs employ cumulative interest methodology, with reinvestment of interest and annual compounding, payable upon maturity.
For FDs, banks provide both cumulative and non-cumulative interest alternatives. Non-cumulative FDs distribute interest quarterly, whilst cumulative FDs reinvest earnings, resulting in compound growth.
Bank FDs featuring quarterly interest compounding potentially deliver higher yearly returns compared to their annual rates. For example, an FD offering 7.5% annual interest actually generates 7.71% yearly returns, exceeding NSC’s 7.7% annual rate with yearly compounding, says ET.
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NSC Vs FDs: Tax Benefits
- NSC and tax-saving FDs both qualify for Section 80C deductions up to Rs 1.5 lakh, but differ in interest taxation:
- NSC: Interest earnings are taxable but considered reinvested (excluding final year), qualifying for Section 80C deduction. Fifth-year interest requires declaration under “Income from Other Sources” in tax returns.
- Tax-saving FD: Interest is entirely taxable according to income tax brackets. TDS applies when combined FD interest earnings surpass the threshold.
NSC Vs FD Lock-in Period
NSC maintains a five-year lock-in, permitting early withdrawal only in specific circumstances like death or court directives. Tax-saving FDs similarly require five-year mandatory lock-in, prohibiting premature withdrawals.
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NSC Vs FD: What should you opt for?
Both instruments represent secure investment options. NSC offers government backing, whilst tax-saving FDs provide DICGC protection up to Rs 5 lakh per depositor per bank.
For 2025, NSC presents advantages in tax efficiency and post-tax returns, offering competitive interest rates, tax benefits on reinvested interest, and government security. Consider comparing FD annual yields with NSC rates for optimal returns. TDS implications become significant for multiple FD holders, subject to applicable tax brackets.