It is that time of the year when people are scouting for last-minute tax-saving options as the financial year comes to a close.
Among the instruments that qualify for a deduction of up to ₹1.5 lakh under Section 80C, the National Saving Certificate (NSC) and five-year tax-saving bank fixed deposits (FDs) are among the preferred options.
Both instruments have a lock-in period of five years. Let’s understand the features of both and how to choose which one is better:
Rate of interest: The rate of interest for tax-saving fixed deposits differs from bank to bank and currently ranges between 5.3% and 7%, while the NSC offers an interest rate of 6.8% for the quarter to March 2021.
NSC’s interest rates are revised on a quarterly basis by the government, while the bank FD rates are determined by the bank.
Tax deducted at source (TDS) will be applicable on the interest rates of bank FDs, while no TDS is charged on NSC.
Reinvestment of interest: Interest earned on both the NSC and tax-saving FD is taxable in the hands of the investor. In the case of NSC, the interest earned is not paid out to the investor and gets reinvested and accumulated. The interest earned on NSC also qualifies as a deduction under Section 80C.
“In order to claim the interest deduction, the investor has to show the interest earned for the year in the income tax return as other income and claim the interest as deduction under Section 80C under Chapter 4 of the income tax form," said Prakash Hegde, a Bengaluru-based chartered accountant.
In case of bank FD, one has the option to either accumulate the interest and receive payment on maturity or go for a quarterly payout. Interest on bank FDs can’t be claimed as deduction under Section 80C.
“The person can choose between mercantile method of taxation and show the interest income every year in the tax forms, or show the interest earned in the year of maturity as per cash received basis. But once chosen, the method has to be followed every year," said Hedge.
Both NSC and tax-saving bank FDs have the same tenure and no upper limit on investment. However, experts generally prefer NSC, given the higher interest rates it is offering currently.
“These two options are generally recommended for senior citizens. I would prefer NSC because of the higher interest rate it is offering and the interest deduction benefit under Section 80C it offers," said Pratibha Girish, a certified financial planner and founder of Finwise Personal Finance solutions, a mutual fund distribution firm.
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