If you have cash and an investment choice to make, then NSC as well as fixed deposits are the two most popular financial tools. However, both these tools are beneficial in their own unique ways.

National Savings Certificate or NSC is one of the primary savings scheme floated and held by the government of India. The scheme offers lucrative returns to customers and is a safe bet for people looking for a low-risk investment choice. On the other hand, fixed deposits are instruments offered by both private and public banks and even by other non-banking financial institutions too.

Which financial tool should be preferred out of NSCs and FDs and why?

Based on various parameters listed below, you can make a choice between which financial tool to opt for, fixed deposits or NSCs. Both these investment options have their pros and cons and their demand may vary depending upon customers preferences.

• Rate of interest offered

NSCs

Returns offered by NSCs are in the range of 8.5% - 8.8% which is comparable to what is offered by fixed deposit schemes of banks and NBFCs. However, interest rates on NSCs are calculated every six months and hence the effective rate of interest comes to around 8.78% - 9.00%.

Fixed Deposits

Fixed deposit schemes offer interest rates that vary with respect to the lock-in period. Apart from regular schemes, special and higher rates of interest are offered to customers. FDs allow almost accurate calculation of final returns if you know the rate of interest being offered by the bank on your deposit.

• Lock-in period (Liquidity of cash)

NSCs

Lock-in period for NSC schemes is either 5 years or 10 years. The rate of interest offered on 10 year term NSCs is greater than that offered on 5 year term. Some customers thus are not comfortable with such long lock-in periods and hence prefer to invest their money in fixed deposit schemes which offer higher liquidity than NSCs.

Fixed Deposits

Fixed deposit schemes offer interest rates that vary with respect to the lock-in period. Apart from regular schemes, special and higher rates of interest are offered to customers. Customers can choose deposit periods depending upon their convenience and the rate of return they are fine with. Even when fixed deposits are made for a specific tenure, the money can be pre-maturely withdrawn with or without paying any pre-mature withdrawal fee.

• Applicable tax on returns earned

NSCs

Returns earned from NSCs are exempt from income tax under section 80C of the Income Tax Act. This signifies that actual returns are even higher than those estimated. This makes NSC a good investment choice for customers who do not mind locking their money for longer periods.

Fixed Deposits

Returns earned on fixed deposits are taxable and hence actual returns might not be as high as quoted by banks. However, certain fixed deposit schemes like the tax saver deposit scheme offered by almost all major private and public sector banks, is a good scheme under which tax deduction under section 80D of the Income Tax Act, can be claimed.

• Premature withdrawal feature

NSCs

National Savings Certificate has this one major drawback of unavailability of premature withdrawal before the tenure of 5 or 10 years gets completed. Your NSC can only be withdrawn prematurely under the following three conditions –

• On death of the holder
• On forfeiture of scheme by some gazette government officer
• When withdrawal is ordered by court of law

Fixed Deposits

Premature withdrawal of fixed deposits is allowed by almost all banks and NBFCs. This pre-closure, however, is charged a specific pre-mature withdrawal fee which depends upon the bank in which you have your fixed deposit account. Some banks do not charge any fee for withdrawing deposits prematurely.

• Loan facility

NSCs

National Savings Certificate are a great financial tool to use as collateral against secured loans. For loans such as car loans, home loans etc. banks expect customers to deposit some form of collateral as security against their loans. These are used to recover money in case customers default to pay off their loans. Financial instruments like NSCs, fixed deposit schemes and insurance policies make great collaterals.

Fixed Deposits

Fixed deposits too like NSCs are preferred by banks as collateral for obtaining secured loans. Fixed deposits with the same bank are even better when availing loans. These deposits are kept as security by banks so that in case a customer defaults in paying off his/her loan, banks are able to recover some amount of money through these deposits.

• Safety of deposit amount

NSCs

National Savings Certificate are financial instruments issues by the government of India and as such the safety of capital invested is quite high.

Fixed Deposits

Fixed deposits too like NSCs are quite secure. However, FD schemes by public sector banks are considered to be safer than those offered by private sector banks and NBFCs. Customers who are conservative with respect to their savings habit should opt for deposits offered by government aided banks rather than private banks.

To sum up, it is safe to say that fixed deposits are financial instruments that offer not only great benefits but also flexibility to customers. Deposit schemes can be availed as per the convenience of customers. Their maturity period, premature withdrawal and denomination can be controlled by customers. On the contrary except for the amount of NSC, tenure and premature withdrawal is not by any means in the hands of customers. Any customer who wants to avail more liquidity should opt for fixed deposit schemes and should try levelling the tax return benefit of NSCs by opting for tax-saver deposit schemes.