National Saving Certificate Vs FD

In the Income Tax Law, there are various investments for which deduction is available for individuals while computing their tax liability. Among those provisions, section 80C is one of the most popular ones. It provides up to Rs. 1.5 lakh as deduction depending upon the amount invested in the mentioned instruments. NSC (National Saving Certificate) and Tax Saving FD (Fixed Deposit) are two of the most used investments mentioned in section 80C.

Both NSC and Tax Saving FD are among the safest investment options for an individual, but they are not readily convertible to cash. Therefore, these options are well suited for medium or long term investment. Some of the common features of NSC and Tax Saving FD are:

1. If you invest in NSC or Tax Saving FD, then you can claim tax benefit for them under Section 80C of the Income Tax Act, 1961.
2. There is no limit for the maximum amount that you can invest in these two instruments. It makes them even more attractive.
3. Both NSC and Tax Saving FD have a lock-in period of 5 years. It means that before 5 years you can not withdraw any amount from your investment made in these two options.
4. Another common feature between these two options is that both of them provide a fixed interest rate on investment for the entire tenure of investment. Thus, there is no effect of any market fluctuations on your investment.

Now let us dive into some of the difference between NSC and Tax Saving FD:

1. The current interest rate of NSC is 6.8%. While the rate of interest for tax saving FD ranges between 5-8% depending upon the bank you opt for making the deposit.
2. The interest amount is compounded annually in case of NSC while for FD generally, it is quarterly compounding.
3. In case you need funds, you can use NSC as collateral to acquire a loan. However, the tax-saving FDs do not allow this facility like the regular FD in which loan against the fixed deposit is available.
4. In the case of NSC, no TDS is deducted for the interest earned. Whereas TDS is deducted for the interest earned on tax-saving fd.

The interest earned in NSC is reinvested, and in order to claim its tax benefit, you need to first show it under the ‘Income from Other Sources’. Another important point is that only the interest accrued in the first four years qualifies for tax benefit. The interest earned in the fifth year gets paid along with the maturity amount to the investor and is not eligible for deduction.

The rate of interest you earn on NSC is decided by the central government, whereas, the rate of interest for tax saving fd is decided by the bank and post office for their respective deposit facility. Also, the TDS is deducted at the rate of 10% for interest earned on tax-saving fd when it reaches above Rs. 10,000 in a financial year. In case PAN is not submitted, TDS is deducted at the rate of 20%. While for interest earned on NSC, there is no TDS deduction. Senior citizens and individuals whose income falls under the exempt income tax bracket can submit Form 15G or Form 15H to avoid the deduction of TDS on the interest earned from fixed deposit.