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  • NSC vs FD

    National Savings Certificates vs Fixed Deposits

    It is imperative to understand what these small savings schemes actually mean and how they operate before we actually pit them against each other to find out which one is better for which situation.

    What is a National Savings Certificate?

    National Savings Certificates, popularly abbreviated as NSCs are instruments issued by the Government of India under the small savings tier. They have inherent tax savings and investment features associated with them. They fall under the postal savings schemes of the Indian Postal Service. Typically, they have two variants, the NSC VIII issue and the NSC IX issue. While trusts and HUFs cannot invest in the VIII variant, every Indian citizen is allowed to invest under the NSC IX issue. These can be purchased from any postal office of India by an adult in his/her own name, on behalf of a minor, a trust and two adults only. The denominations of such certificates range in INR 100, INR 500, INR 1000, INR 5000 and INR 10000. NSC VIII issue has an interest rate of 8.50% per annum and NSC IX has an interest rate of 8.80% per annum as of April 2013. While investments of up to INR 150000 are qualified for income tax rebate, interest earned on NSC is still taxable as per the VIII issue only. The maturity periods of NSCs can be 5 years or 10 years.

    What is a Fixed Deposit?

    Fixed Deposits, otherwise known as Term Deposits elsewhere, are stable instruments of savings and investment authorised by the Reserve Bank of India. These deposits can be as low as 7 days or as high as 10 years in tenure. Fixed deposit accounts may or may not require the individual to open another account with the bank, separate from the savings or current account that is already in place. Almost every bank in India offers the option to open a fixed deposit account subject to the tenure limits and minimum savings required to be done therein. There are a few optional fixed deposit options that are offered by selected financial institutions which come with a tax-saving feature. These specialised fixed deposits normally have a longer lock-in period and lack a few flexibility options in terms of financial liquidity when compared to contemporary fixed deposit options. The rate of interest offered on fixed deposits differs from bank to bank and is linked to the base rate of the bank in question.

    National Savings Certificates vs. Fixed Deposits

    Now that we have had a refresher course in what each of the savings scheme actually does, let’s take a look at how each of these stack up against each other in comparison of features.

    National Savings Certificates

    Offering more returns over a sizably longer investment period, these are stable financial instruments that have added tax benefits.

    1. Rate of Interest – As mentioned above, these instruments offer rates of interest ranging from 8.5% to 8.8% per annum, calculated every six months, bringing the effective rate to somewhat around 9% per annum
    2. Financial Liquidity – Mandatory lock-in periods of either 5 years or 10 years make these investment schemes a choice for a long term goal, rather than something in the near future. Consequently, 10-year NSCs pay out better than 5-year ones
    3. Taxable returns – NSC VIII issue mandates that returns will be taxable, while the newer NSC IX that is currently available is tax free. The returns enjoy tax exemption as under Section 80C of the IT Act, making the effective returns through NSC even higher
    4. Premature withdrawal of funds – NSCs give a hard time when it comes to withdrawing investments before the maturity of 5 years or 10 years is done. Only under cases of the demise of the account holder, forfeiture of account by a gazetted officer or by order of law is this possible
    5. Loans – Having lock-in periods of 5 years and 10 years and being stable financial instruments, NSCs can easily be used as collaterals for availing loans for vehicles, housing and other secured loans
    6. Investment Security – Provided by the Government of India, NSCs offer rates that rarely change in a major way and are the safest possible investment one can make in India

    Fixed Deposits

    The no-nonsense investment option for the common man who wants a higher rate of interest than what is offered on savings accounts.

    1. Rate of Interest – As mentioned above, these financial instruments offer rates of interest that are linked to the respective bank’s base rate. Though higher than the interest rate of the bank’s savings accounts, the interest rate might never be higher than 8.7% per annum
    2. Financial Liquidity – With deposit periods as low as 7 days, there is rarely any need for someone to fret over lock-in periods. But fixed deposits do not have a mandatory lock-in period either
    3. Taxable returns – Save for a few tax savings deposits that are initiated by a few banks, the returns of any fixed deposit are taxable. For the tax-saver accounts, applicable tax benefits can be availed as per Section 80D of the Income Tax Act of 1961
    4. Premature withdrawal of funds – Banks might or might not charge a premature withdrawal fee if one decides to pull out of any particular fixed deposit scheme. Nevertheless, closing a fixed deposit account is always possible with minimal hassle
    5. Loans – Fixed deposits are as stable financial instruments as NSCs and can easily be used as collaterals for availing loans for vehicles, housing and other secured loans. Better rates can be availed on loans, if the fixed deposits being pledged are with the same bank
    6. Investment Security – Though nothing can beat the investment security of NSCs, the rule of thumb says that investing in fixed deposit schemes of public sector banks is always safer than doing so in private sector banks

    Small Savings going Big

    Investment as an option for growth of wealth is always a lucrative term for the financially wise. While both fixed deposits and NSCs score pretty good points when investment is considered, thinking about the potential higher returns on NSCs makes them the obvious first choice since a no-frills tax exemption comes with the package, protecting the returns. On the other hand, fixed deposits can be handy when liquidity is the priority. It is advisable, thus, to set aside a lump sum in NSCs for something really grand, like a dream wedding. While for the next batch of tuition fees or your next vehicle, fixed deposits can be the go-to option.

    Important NSC Related Reads

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