Is National Saving Certificate Better Than Fixed Deposits?

The National Saving Certificate (NSC) and Fixed Deposit (FD) are short-term debt instruments (five-year lock-in) with tax benefits. After the interest rate revision for the April-June quarter of 2023 on small saving schemes, NSC has become attractive with a 7.7 per cent interest rate, higher than most banks currently offer. For example, the State Bank of India (SBI) offers 6.5 per cent for a five-year FD, and ICICI Bank gives 7 per cent.  

Let's look at their features and what they offer.  

National Saving Certificate (NSC)  

NSC is a government-backed fixed-income investment option. You can start with a minimum amount of Rs 1,000 and multiples of Rs 100 without any maximum investment limit. You will need to visit a post office to invest in NSC. The interest is compounded annually and payable on maturity. You can claim income tax exemption of up to Rs 1.5 lakh on the invested amount under section 80C of the Income-tax Act 1961.  

You cannon renew the scheme after the end of the five-year tenure. To continue investing, you must purchase a new NSC certificate with an applicable interest rate. Also, note that the interest rate provided when buying the certificate remains unchanged throughout the tenure.  

NSC could be sensitive to changes in interest rates, which is also its drawback. If interest rates go up, you cannot prematurely withdraw to take advantage of it, and when inflation goes high, the return may be low.  

Fixed Deposits (FDs)

You can invest in bank and post office fixed deposit schemes. The tenure starts from 7 days to 10 years, but the tax-saving benefits under section 80C are available only on five-year lock-in. However, the FD interest rates can vary from bank to bank, so check each bank separately.  

If tax-saving is the main objective of an FD, remember that the interest earned is taxable as per the tax slab. Fixed-income tools, like NSC, also carry a risk of losing returns if inflation rises.  

Should You Invest In NSC Or FD?

Interest Payout  

In NSC, you get a cumulative interest on maturity, so there is no provision for receiving interest income during the lock-in period. However, in an FD, you can take a monthly or quarterly interest or on maturity.  

Compounding Frequency

Interest is compounded annually in NSC, while in FD, it is compounded quarterly. Therefore, if you take the reinvestment option in fixed deposits, the yield would be higher with a higher compounding frequency.  

Taxation

In both instruments, you get section 80C benefits of up to Rs 150,000 in one year.  

In NSC, tax is not deducted at the source (TDS), whereas in fixed deposits, 10 per cent TDS is applicable if the interest amount goes above Rs 40,000 annually. For senior citizens, this limit is Rs 50,000. You can avoid TDS on fixed deposits' interest by submitting Form 15G (15H in case of senior citizen).  

However, the interest income is taxable as per the tax slab in both instruments. Therefore, you may pay the tax on interest on an accrual basis or when filing your tax return.    

Maximum Investment Limit

NSC investment has no upper investment limit, whereas tax-saver FDs, in some banks, have an upper limit of Rs 1.5 lakh. So, even if you do not want a tax benefit, investing in NSC at a high-interest rate for five years means guaranteed income.  

Both instruments promise a guaranteed income, but NSC offers a sovereign guarantee. When tax benefits and lock-in periods are the same in both instruments, you should check the interest rate and your need for regular payout to find the suitable option.