NSC vs. Bank FDs: Which Offers Better Tax Savings and Greater Returns?
In seeking secure investment options that are additionally tax deductible, the National Savings Certificate (NSC) and bank Fixed Deposits (FDs) as tax-saving investments are two funds that are broadly in demand. Both have guaranteed returns, tax exemptions under Section 80C, and a compulsory lock-in of five years. While both products are similar in nature, variation in interest rates, compounding, and treatment of tax may affect overall yields, and it is, therefore, crucial to compare both before investing.
National Savings Certificate (NSC)
NSC is a government-guaranteed savings scheme meant to generate guaranteed returns and support long-term savings. Being a five-year locked-in scheme, it is a secure investment plan that also entitles investors to tax deductions.
Bank FDs (Fixed Deposits)
A Fixed Deposit is a type of investment instrument in which you put lump sum money in your bank account for a fixed time period at a fixed rate of interest. At the end of the time frame of the fixed deposit, you receive the amount you have invested along with the compound interest.
Interest Rates: NSC vs. Bank FDs
For the quarter ending January to March 2025, NSC pays an interest rate of 7.7% per annum compounded annually. For contrast, interest rates for bank FDs from leading banks range between 6.5% and 7.5% per annum.
Interest Rates payable by Some Banks for FDs
- HDFC Bank, ICICI Bank: 7%
- SBI and PNB: 6.5%
- DCB Bank: 8%
- IndusInd Bank and Yes Bank: 7.25%
- Utkarsh Bank: 7.50%
One major benefit of NSC is that interest income does not have any Tax Deducted at Source (TDS) involved. Whereas TDS on FD interest income is applicable in case the same exceeds Rs.40,000 for normal citizens and Rs.50,000 for senior citizens for the current financial year. As of the next financial year, the threshold of TDS will be Rs. 50,000 for general citizens and Rs.1 lakh for senior citizens.
Interest Calculation Modes
NSC adopts the cumulative interest payment mode, where interest is reinvested every year and paid when the NSC matures. Banks, however, provide both cumulative and non-cumulative options for FDs.
- Non-cumulative FDs return interest at periodic intervals (usually quarterly).
- Compounding FDs reinvest interest, resulting in compounding returns over a period of time.
The compounding technique in FDs can make a difference in overall returns. For instance, a bank FD at 7.5% annual rate of interest compounded quarterly will provide an effective return of 7.71% per year, which is higher than 7.7% per annum return under NSC with annual compounding.
Tax Benefits and Treatment of Interest
Both bank FDs and NSC are tax-deductible for Rs.1.5 lakh under Section 80C. The tax treatment of interest income is, however, different:
- NSC: Income earned is taxable but is deemed to be reinvested (other than in the last year), and hence can be claimed as a deduction under Section 80C. Income earned in the fifth year is taxable and is to be reported under “Income from Other Sources” in the return of income.
- Bank FDs: Interest income is completely taxable on the investor’s tax slab of income. TDS is applicable in the case of several FDs resulting in interest accruals during a year above the TDS limit.
Lock-in Period and Withdrawal Policy
Bank FDs and NSC both have the mandatory lock-in period of five years. Withdrawal before the scheduled date is not permitted other than in exceptional situations such as the death of the investor or as directed by a court.
Which is a Better Investment?
Both bank FDs and NSC are low-risk investments. Although NSC is government-guaranteed and hence nearly risk-free, bank FDs are insured against the DICGC scheme up to Rs.5 lakh for each account holder in each bank.
For tax-efficient investors and returns after tax in 2025, NSC is a superior choice since it commands a slightly higher rate of interest, tax relief on reinvested interest, and state security. When compared on the basis of returns, the yearly yield of bank FDs must be considered it. If the annualised yield on an FD is more than the rate of NSC, then it could potentially offer higher returns in total. And TDS considerations need to be taken into account, especially by those holding multiple FDs, as applicable slabs of taxes may reduce net returns.
