Thursday, February 8, 2018

NSC or Tax Saver FD – Where should you Invest?

When it comes to tax planning there are variety of investment instruments yielding different returns, depending on the risk you are willing to take and the flexibility you desire from the instrument. As you know ELSS is a great investment avenue from tax planning perspective as it yields market based return.  which could be sometimes very high but is also subjected to volatility. This particular instrument is good for young professionals who have time by their side. Young investors are also able to withstand volatility better than elderly professionals as markets beat all other asset classes on a 10-year time period by a wide margin.

But if you are risk averse then Tax Saver Fixed Deposits, National Saving Certificates & Public Provident Fund are the popular choices in India. FD Interest Rates are generally lowest among these three but FDs offer quarterly compounding which results in somewhat similar yields. PPFs are similar to EPFs, with relatively lesser benefits, but available to all citizens of India irrespective of their profession. Since EPF or Employee Provident Fund is available to most salaried individuals, they can choose between Tax Saver FDs & NSCs for further investments from tax-saving point of view. In this article we will explore the similarities and differences between these two instruments.

Similarities between NSC and Tax saver FDs:
  • 5 Year Lock In Period
  • Tax benefit under Section 80C of the Income Tax Act
  • Fixed interest rate for the tenure of investment
  • Interest Earned is taxable under the head, Income from other source.
  • Easy to invest

Differences between NSC and Tax Saver FDs:
  • NSC is not subjected to Tax deduction at source (TDS) while Tax Saver FDs attract TDS.
  • National Saving Certificates can be used to avail loan while Tax saver FDs cannot be used as collateral to avail loan.
  • Tax Saver FDs are compounded quarterly and yield higher returns than NSCs, which are compounded yearly, if interest rates on both of them are same. But in general, NSC interest rates are higher than the interest rates offered by large national & private banks in India and thus counterbalance the former quarterly compounding benefits. Smaller and relatively newer banks & NBFCs might offer higher interest rates on most deposits. You can use an FD calculator to check the amount you will get from your deposit on maturity.

National Savings Certificates clearly stand out and score over Tax Saver Fixed Deposits due to its non TDS, Collateral facility and higher rates benefits. It is also extremely easy to buy NSCs. All you have to do is reach a post office near you, open a savings a/c and purchase the certificates. 

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