NSC vs tax-saving bank fixed deposit (FD): What you need to know
Here are 10 things to about income tax benefits, interest rate, maturity and other features of National Savings Certificate (NSC) and 5-year tax-saving bank fixed deposit
5-year income tax saving bank fixed deposits (FDs) and NSC or National Savings Certificate are among the savings options that offer income tax benefits under Section 80C. Investment in 5-year tax-saving FDs and NSC up to Rs 1.5 lakh a year qualifies for tax deduction. The amount so invested is deducted from gross total income to arrive at taxable income. The interest rates on small savings schemes like NSC and PPF are reviewed every quarter. Both NSC and tax-saving FDs have a lock-in period of five years. Some banks like SBI offer income tax saving bank fixed deposits for up to 10 years. But the lock-in period is five years.
10 things to know about NSC and 5-year tax-saving bank fixed deposit (FDs):
1) Currently, NSC fetches an interest rate of 7.6%, compounded annually. In other words, Rs. 100 invested in NSC grows to Rs. 144.23 after five years.
2) SBI, for example, offers an interest rate of 6.85% on deposits between 5 years and 10 years, compounded quarterly. Senior citizens get 50 bps additional interest.
3) The minimum amount required to open a SBI tax-saving deposit, for example, is Rs 1,000 or in multiples thereof. The minimum amount varies from bank to bank. In case of NSC, the minimum investment amount is Rs 100 and in multiples thereof. There is no maximum limit.
4) In case of a 5-year tax-saving bank FD, an investor can choose regular interest payout mode (monthly/quarterly) or cumulative mode where the interest is reinvested with the principal amount.
5) In case of NSC, the interest is not paid to the investor each year but it accumulates.
6) It should be noted that the income tax benefit is available to only the first holder of the 5-year tax-saving bank FD.
7) No loan is extended against the 5-year tax-saving bank FD.
8) However, NSCs can be pledged as security to get a loan.
9) The interest earned on the 5-year tax-saving FD is taxable according to the investor’s tax bracket. TDS or tax deducted at source, is applicable.
10) In case of NSC, in terms of income tax implications, interest accrued yearly on NSCs is deemed to be reinvested on behalf of the investor and qualifies for deduction under Section 80C within the total limit of Rs 1.5 lakh. But since the final year’s or the fifth year’s interest is not reinvested, it cannot be claimed as a deduction from taxable income under Section 80C. So, the final year’s interest is added to the certificate-holder’s income and taxed accordingly.