NSC Vs Tax Saver Bank FD: Which is a better choice for you?

Lots of investors get confused between these two tax-saving options – National Savings Certificate (NSC) and Tax Saver Bank FD – regarding where to invest and which of these two will be a better option for them. Both post office 5-year NSC and 5-year bank fixed deposit qualify for tax benefits under Section 80C of the Income Tax Act. In the case of bank FDs, the tax benefit will only be applicable to the specified deposits made in the 5-year tax-saving fixed deposits (FD).

With the 5-year Tax Saving Bank Fixed Deposit, there is no regular interest payment, unlike NSC where the depositors can receive fixed interest either monthly or quarterly. Hence, experts say depending on how you want interest payments, you can choose between the two. In the case of NSC, the interest accrued gets reinvested annually for the initial 4 years, which qualifies for tax benefit each year as well.

5-year tax-saving bank FD – The 5-year tax-saving bank fixed deposits can be opted for at any private, public sector or Small Finance Bank, to get tax benefits. The investment can be made either through online net banking or by visiting the bank branch. Through online one can make the investment immediately and can avail tax benefit at the same.

Investors need to make sure that their PAN is linked to their savings account, as at the end of the lock-in period or maturity, the proceeds are directly sent to one’s savings account. Note that one can invest a maximum of Rs 1.5 lakh in a 5-year tax-saving bank fixed deposit for tax benefits in a financial year. Even though the deposit can be made in joint names, the tax benefit, however, can only be availed by the first holder in whose name the investment has been made.

With these types of bank FDs, partial or premature withdrawal is not allowed nor any loan facility is available, and the lock-in is 5 years from the date of deposit.

Post Office NSC – At the start of each quarter of the Financial Year, the rates of post office schemes, including NSC, are set by the government. Having said that, the rate remains fixed for the entire tenure for an investor after invested in either of these two tax saving options.

In the year when the interest gets accrued, the interest earned is fully taxable and has to be added to the income under head ‘Income from other sources, even though there is tax benefit on the investment made in both of these tax saving options.

Experts however say one should not look at only the interest rate while choosing between the two investments. For instance, in bank FD, the compounding is done quarterly, and with NSC it is done on an annual basis. Note that, both these are fixed-income tax savers and they are ideal for ultra-conservative investors.