NSC vs FD: What are the Key Differences?
Suppose you are exploring low-risk investment options that offer guaranteed returns and fixed income. In that case, National Savings Certificate (NSC) and Fixed Deposit (FD) are two names you may have come across. Both schemes offer a fixed rate of interest and guaranteed returns upon maturity. However, before you select any scheme, you must understand the difference between FD and NSC. So, let us explain NSC and bank FD schemes and compare their details to help you choose a better investment option.
- Interest Rate (NSC vs. FD): For NSCs, the government normally sets the rate, which is constant during the course of the tenure. NSCs currently offer 7.7% p.a, where as banks offer anywhere from 3% to 7.25% typically on FDs.
- Tenure (NSC vs. FD): For NSCs, a normal tenure is 5 years. However, FDs give investors more options because they have a wider range of tenures from 7 days to 10 years.
- Minimum Investment (NSC versus FD): The minimum investment for NSCs is typically cheap, starting at just Rs. 100. On the other hand, bigger initial deposits may be required for FDs; these deposits vary between banks, although many need a minimum of Rs. 1,000 or more.
National Savings Certificate (NSC) Scheme
National Saving Certificate (NSC) is a saving cum investment scheme introduced by the Indian Government and run by post offices. This scheme allows you to invest in government bonds. Here is a brief walkthrough of the features of the NSC to get you started:
- The investment tenure of the scheme is five years.
- You must invest a minimum of Rs. 1,000, but there is no maximum investment limit.
- The rate of interest for the NSC scheme is fixed and compounded annually. From July 1, 2023, the applicable rate of interest for the NSC scheme is 7.7% per annum.
- Returns are guaranteed, fixed, and paid upon maturity.
- As the returns are paid on maturity and the calculation method is compounding then can one claim tax deduction for the amount accrued in the first year in the second year.
- Means, If I invest x amount and Y amount of interest is accrued on that. Since the new sum for calculation of interest in second year is X=Y, can I claim Y as tax exemption in second year.
- Premature withdrawals are allowed under specific conditions such as order by the court or death of the account holder.
Advantages of NSC
- Tax deductions on investments up to Rs. 1,50,000 are allowed under Section 80C of the Income Tax Act, 1961, making it a tax-saving, safe investment option. However, the interest earned is taxable.
- The interest rate is fixed throughout the tenure of five years. So, NSC offers guaranteed returns, unlike mutual funds and stock investments. If you compare NSC vs FD in terms of rate of interest, the rate provided by the NSC scheme is higher than that of fixed deposit.
- The government backing makes the NSC scheme one of the safest investment options.
- The minimum investment limit is Rs. 1,000, with no maximum limit. In addition, you are allowed to purchase multiple certificates.
- You can open an NSC account on behalf of a minor.
- The NSC can be used as collateral for securing a loan.
- Joint holding of accounts is allowed for up to three adults per account.
Who Should Invest in NSC?
NSC is the ideal scheme for you:
- If you want to invest in safe, fixed-income investment schemes while saving on taxes.
- If you wish to save up for a financial goal with a time horizon of five years or more.
The NSC scheme has a lock-in period of five years. So, purchase an NSC only if you can have your money invested for that long.
A fixed deposit (FD) is an investment scheme in which you can invest a lump sum amount at a fixed interest rate for a particular duration. Some of its salient features are:
- It is offered by banks and Non-Banking Financial Companies (NBFCs).
- The interest rate remains the same throughout the tenure, so FDs offer guaranteed and fixed returns.
- The interest rate on FDs may vary based on the FD provider and tenure.
- The interest amount is credited either upon maturity (cumulative FD) or paid regularly to the depositor (non-cumulative FD).
- Premature withdrawal is allowed with a penalty.
- Some FDs offer tax deduction benefits, but not all.
Advantages of FD
- The ROI on FDs is fixed and guaranteed. Unlike mutual funds and stocks, this makes FDs a safe investment option.
- The tenure for investment in an FD varies from 7 days to 10 years. If you compare NSC vs FD, the minimum tenure for the FD is seven days, while the maximum is ten years. On the other hand, the NSC scheme is slightly less flexible as it comes with a five-year fixed tenure.
- The interest rate offered by FDs is higher than that provided by a savings account.
- You can open multiple FD accounts.
- Some FDs (known as tax-saver FDs) offer tax-saving benefits for investments up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961.
Who Should Invest in FD?
Suppose you are looking to diversify your investment portfolio and want to invest in a safe investment option that offers guaranteed returns. In that case, an FD is an ideal option for you.
Moreover, some of the FDs provide tax-saving benefits. So, if you are looking for an investment option that offers tax deductions, a tax-saver FD can be a good pick.
If you have a surplus amount parked in a savings bank account, you can open an FD account to avail of a higher interest rate than what the savings account would offer. Investing in FD is beneficial to earn fixed returns for short-term or long-term financial goals.
Differences between NSC and FD
While exploring both options, you must be wondering, which is better? NSC or FD? The comparative analysis of NSC vs FD will help you in choosing the most suitable option:
|Investment tenure||5 years||Varies from 7 days to 10 years|
|Rate of interest||7.7%, compounded annually||Depends upon the FD provider and investment tenure|
|Liquidity||NSC can be used as collateral for availing loans.||FD can also be used as collateral for availing loans.|
|Minimum investment||Rs. 1,000||Depends upon the bank/NBFC|
|Maximum investment||There is no maximum limit.||There is no maximum limit.|
|Premature withdrawal||Allowed under specific conditions||Allowed, with penalty|
|Tax benefits||Tax deduction on investments up to Rs. 1,50,000.||Only some FDs offer tax deduction on investments up to Rs. 1,50,000.|
When choosing between NSC and FD as your preferred investment avenue, it’s crucial to align your choice with your financial objectives. The NSC boasts a stable five-year tenure, whereas FDs present the advantage of customizable investment periods. Importantly, NSC typically offers more attractive interest rates in comparison to many FDs.
Yet, it’s crucial to remember that with the higher interest of NSC comes the condition of a fixed five-year lock-in period. This means if an unforeseen financial emergency arises, you won’t have the convenience of premature withdrawal. Conversely, FDs provide the flexibility of early withdrawal before reaching maturity.
In conclusion, the decision between NSC and FD should be guided by your financial goals and the liquidity you might need at a given point.
Does every FD offer tax-saving benefits?
No, every FD does not offer tax-saving benefits. For tax-saving benefits, you must invest in an FD for at least five years.
Can I use FD as collateral for availing loans like NSC?
Yes, almost every bank and NBFC offers the facility of using FD as collateral for availing loans. Usually, banks and NBFCs may approve a loan amount up to 90-95% of the FD amount.
How many accounts can I open Under the NSC and FD schemes?
There is no limit on the number of accounts. You can open multiple accounts under both NSC and FD schemes.
What are the minimum and maximum investment limits for NSC and FD schemes?
The minimum investment limit for an NSC scheme is Rs. 1,000. However, there is no limit on the maximum investment. For FDs, the minimum investment limit depends upon the FD provider (bank or NBFC) and the investment tenure. However, like NSC, there is no cap on the amount of investment you can make.