Tax savings FDs vs National Savings Certificate? Check interest rate and other details to choose what works best for you

Tax saving fixed deposits (FDs) and the National Savings Certificate (NSC) are both safe and reliable instruments for conservative investors to earn consistent returns.

When you compare the rate of interest on these options to simply parking your money in a savings account, the yield is demonstratively higher. These are also great tools for goal-oriented savings and can be auto deducted from your bank account to ensure monthly contribution towards the lumpsum.

However, it is advisable to research and compare both options to your own specific needs before making a choice. Notably, tax saving FDs are offered by public and private banks in India, while the NSC is offered by India Post.

So, if you are confused over whether to choose tax saving FDs or National Savings Certificate, check the rate of interest, benefits, eligibility and other details below, and then make a choice based on what works best for your specific needs.

Tax Saving FD: How does this work and what are the benefits?

A Tax Saving FD is a fixed deposit option aimed at increasing your savings and reducing tax burden, under the Old Regime. Notably, this deposit type mandates a five-year lock-in period, with interest earned calculated as income only in the year of withdrawal.

A tax saving FD is part of the deductions allowed under Section 80C of the Income Tax Act, which also includes your public provident fund, EPFO and NPS. Hence, the maximum investment you can make each year for tax benefit is limited to ₹1.5 lakh.

Here are the key highlights:

• Tenure for a tax saving FD with a bank is for minimum period of five years, and a maximum of 10 years.
• Across banks, the annual rate of interest this year is between 5.5-7.75%.

• According to the State Bank of India (SBI) official website, a minimum first deposit of ₹1,000 for individuals and ₹10,000 for senior citizens is needed to start a tax saving FD, with subsequent deposits of at least ₹100 each month over the five-to-10-year period.
• TDS on interest earned is applicable as per the relevant slab and you can submit the Form 15G/15H to get an exemption as per I-T rules.
• Early encashment is not available before the five-year lock-in, except in case of death of depositor. Here, only the nominee/legal heirs can withdraw the deposit any time before or after maturity, the SBI website states.
• You cannot take a loan against a tax saving FD or use it for overdraft facility.
• These FDs can be availed by individual Indian residents, senior citizens, Hindu Undivided Families (HUFs), non-resident Indians (NRIs), and by parents on behalf of children.

• The SBI website notes that in case of a joint account, the FD will be issued jointly to two adults or to an adult and a minor. Here too, in case of death of first account holder in joint account, the other holder is entitled to withdraw the deposit before its maturity.
• Tax saving FDs are a low-risk investment option and offer steady returns.

National Savings Certificate: All you need to know

Offered by India Post branches across India, the National Savings Certificate (NSC) has a fixed annual interest rate of 7.7% this year, according to the official website.

Further, it requires a minimum initial investment of ₹1,000, with subsequent deposits of at least ₹100 each month over a five-year period. There is no upper limit, but anything above ₹1.5 lakh in a year would not qualify for Section 80C deduction.

What is the eligibility requirements for NSC?

• All Indian residents can invest in NSC.
• In case of joint accounts, the Joint ‘A’ type, allows operation by all depositors or the surviving depositors jointly; Joint ‘B’ type, allows operation by any of the depositors or the surviving depositors separately.

• A guardian can also start a NSC on behalf of minor and a person of unsound mind (under Authorised Account). However, once the minor reaches 18 years of age, they must submit a new Account Opening Form (AOF) and fresh KYC documents at their Post Office to convert their minor account into an adult account.
• You can open any number of accounts.
• Please note e-banking facility is only available for those holding a Post Office Savings Account.

Can I close or transfer the NSC account?

• According to the India Post website, you can close the account before maturity in the following cases: Death of the account holder in a single account, or any or all the account holders in a joint account or when ordered by a court.

• If an account is closed prematurely before completion of one-year from the date of deposit, only principal amount shall be payable. Further, if an account is closed prematurely before completion of three years from the date of deposit, interest on principal amount at rate applicable for the completed months shall be payable.
• An account can be transferred in case of death to heirs / surviving account holders, or on court order.

Tax saving FDs vs NCS: Comparison chart

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.