NSC Vs Tax Saver Bank FD: Which one is better for saving tax – Interest rate, features compared
A fixed deposit in a bank for a period of five years qualifies for tax benefits under Section 80C of the Income Tax Act. The tax benefit will, however, apply only to the specified deposits made in the 5-year tax-saving fixed deposits (FD). Currently, the average interest rate on 5-year tax saving FD in most leading banks is in the range of 5.25 per cent to 6 per cent. Senior citizens get an additional interest rate of 0.5 per cent on the amount deposited. On the other hand, the post office 5-year National Savings Certificate (NSC) is offering 6.8 per cent per annum and also provides similar tax benefits.
Before we see what they have to offer, let us look at how they differ:
A) Unlike NSC in which there is no regular interest payments, in the 5-year Tax Saving Bank Fixed Deposit, the depositors can receive fixed interest either monthly or quarterly. So, depending on how you want interest payments, one can choose accordingly.
B) However, NSC has a unique feature which no other fixed income tax saving investment has. In NSC the interest accrued annually is deemed to be reinvested ( for initial four years) under Section 80C of the I-T Act. In other words, the interest of each year qualifies for tax benefit as well.
5-year tax-saving bank FD
To get a tax benefit by investing in the 5-year tax-saving bank fixed deposit, you can choose any private, public sector or even the Small Finance Banks. The investment can be made by either visiting the bank branch where one holds an account or can even open it online through net banking.
In the online mode, the investment happens immediately and the certificate is generated instantaneously to let one avail tax benefit on the same. However, make sure your PAN is linked to your savings account. At the end of the lock-in period, the maturity proceeds are directly sent to one’s savings account.
The maximum that one may invest in the 5-year tax-saving bank fixed deposit for a tax benefit in one financial year is Rs 1.5 lakh. As per the rules, such deposits do not allow any partial or premature withdrawal and hence the lock-in is 5 years from the date of deposit. Further, such deposits do not allow any loan facility.
One may opt for either monthly or quarterly interest payouts or may even opt for the cumulative option in which case the interest is paid together with the principal at the end of the maturity. The deposit may be made in joint name, the tax benefit, however, can be availed only by the first holder in whose name the investment is made.
Post office NSC
The interest rate of banks may change anytime but in case of post office schemes including NSC, the rates are set by the government at the start of each quarter of the FY. However, once invested in either of these two tax savers, the rate remains fixed for the entire tenure.
Is interest income taxable?
Although there is tax benefit on the investment made in both of these tax savers, the interest earned is fully taxable in them and have to be added to the income head ‘ Income from other sources’, in the year when the interest gets accrued. Thereafter, it is liable to be taxed as per one’s income slab.
What to do
If you have to choose between the two investments – 5-year Tax Saving Bank Fixed Deposit and NSC – do not only look at the interest rate. In NSC, the compounding is on an annual basis while in bank FD, it is quarterly. The shorter the period for compounding, the better is the yield. Both of these are fixed-income tax savers and hence suit ultra-conservative investors. Therefore, consider them only after looking at your income slab as the post-tax return is low in them. Fixed income investments such as FDs and NSC are tools for capital conservation and does not help in generating inflation-beating returns in the long term.
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