This post office scheme offers higher return than tax-saving bank fixed deposits; what to check before investing
Due to easy accessibility, tax-saving fixed deposits (FDs) might be the first option that comes to your mind when you are planning to invest in a fixed-income product that is relatively safe and offers tax benefits. This is especially in the current scenario where interest rates of fixed deposits have gone up substantially in the last 11 months. However, if you are below the age of 60, you can consider this small savings scheme which will now give you a better return than fixed deposits — National Savings Certificate (NSC).The Union government has increased the interest rate of the National Savings Certificate by 70 basis points for the April-June quarter of 2023. For the previous quarter, the interest rate of NSC was 7 per cent. With the latest hike, the interest on National Savings Certificate has jumped to 7.7 per cent. Here is a look at where this interest rate stands when compared to tax saving FDs of prominent banks.
Most popular banks such as HDFC Bank, ICICI Bank, YES Bank, Axis Bank, and IDFC First Bank offer an interest rate of 7 per cent on tax-saving fixed deposits. DCB offers the highest interest rate on five-year fixed deposits at 7.6 per cent while IndusInd Bank offers an interest rate of 7.25 per cent on fixed deposits of the same tenure.
Scheme
Interest rate (%)
National Savings Certificates (VIIIth issue)
7.7%*
Post office 5-year Time Deposit
7.5%#
*Interest rate compounded annually
#Interest rate compounded quarterly
Bank
5-year FD interest rate (%)*
Axis Bank
7
Bank of Baroda
6.5
Canara Bank
6.7
HDFC Bank
7
ICICI Bank
7
IDBI Bank
6.25
IDFC First Bank
7
Induslnd Bank
7.25
Kotak Mahindra Bank
6.2
Punjab National Bank
6.5
State Bank of India
6.5
YES Bank
7
*Interest rates compounded quarterly
For FDs of up to Rs 2 crore as on April 5,2023
Things to remember when investing in National Saving Certificate
The National Savings Certificate or NSC is a post office savings scheme offered by the central government. The minimum amount that needs to be invested in National Savings Certificate is Rs 1,000 and there is no upper limit. However, there is a lock-in period of five years.
Those who are residents of India can invest in NSC. You can jointly invest with up to two adults. NSC can be bought in the name of a minor as well. You can invest in NSC online through the Department of Post internet banking. You can also visit your nearest post office branch to buy National Savings Certificate though other payment modes including cash, cheque and bank demand draft.
Now, let's compare the features of the National Savings Certificate with five-year bank fixed deposits to understand which investment works better for you.
Tenure: National Savings Certificate vs tax-saving FD
The tenure of the National Savings Certificate is five years. Tax-saving fixed deposits also have a tenure of five years.
Interest rate compounding: NSC vs tax-saving fixed deposit
Starting from April 1, 2023, National Savings Certificate will offer an interest rate of 7.7 per cent. Do keep in mind that the interest rate of NSC is compounded annually while bank FDs have quarterly compounding of interest rate which gives a marginally higher annual yield.
The frequency of compounding also plays a major role in determining how much money you will get at the time of maturity. A bank tax-saving fixed deposit offering an interest rate of 7 per cent per annum on a quarterly compounding basis, will earn an effective annualised return of 7.19 per cent. However, due to annual compounding, the effective yield on NSC will remain the same as the nominal interest.
Investment limit: NSC vs tax-saving FD
The minimum investment limit for Nationals Savings Certificate starts from Rs 1,000. However, there is no maximum limit.
Meanwhile, you can only invest up to Rs 1.5 lakh in tax-saving fixed deposits.
Income Tax benefit: NSC vs tax-saving fixed deposit
Individuals can claim income tax deductions of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961 for booking tax-saving fixed deposits or investing in NSC.
The interest income earned on both NSC and tax-saving fixed deposits is taxable as per the tax bracket of the investors. However, the interest earned on NSC is not paid to the investor every financial year. This amount is re-invested in National Savings Certificate. So, you have the option to claim a tax deduction on the interest earned from NSC under Section 80C while filing your income tax return every financial year.
You will first have to show the interest earned on NSC as an 'income from other sources’ and then claim this amount as a deduction under Section 80C. As the tenure of NSC is five years, the interest can be re-invested only for four years. So, you can avail the tax benefit for the first four years. The interest earned in the fifth year will be fully taxable. Do remember that the maximum deduction that can be claimed under Section 80C is Rs 1.5 lakh.
For cumulative fixed deposits such as tax-saving fixed deposits, the interest amount earned and reinvested is not eligible for tax benefits under Section 80C. So, you will have to include it in your income and pay the applicable tax.
TDS: NSC vs tax-saving FD
The interest earned on National Savings Certificate is not subject to tax deducted at source (TDS). On the other hand, a TDS of 10 per cent will be levied when aggregate interest income on all deposits parked with them exceeds Rs 40,000 in a financial year. TDS deduction on the interest income earned on bank tax-saving fixed deposit will also lower your return.
Risk: As explained National Savings Certificate is a small savings scheme backed by the Union government. So, you get the sovereign guarantee. Fixed deposits in a scheduled commercial bank come with minimal risk. Deposits in scheduled banks are insured under the Deposit Insurance Credit Guarantee Corporation's (a wholly-owned subsidiary of the RBI) deposit insurance scheme to the tune of Rs 5 lakh. This insurance includes both the principal and interest amounts. So, dividing your investment into multiple FDs will also be a safer decision.
Premature withdrawal: Tax-saving FD vs NSC
Five-year tax-saving fixed deposits do not allow premature withdrawal. NSC also does not allow premature closure except in case of the death of depositors, on forfeiture by a pledge from a Gazette officer or an order by the court.
Loan facility
Individuals can use NSC as collateral to obtain a loan. However, a bank tax-saving FD cannot be used to take a loan.
Tax-saving FD vs NSC: Where do you get better return?
Let's understand it with an example. For instance, an individual invests Rs 1.5 lakh in a five-year bank fixed deposit at 7 per cent rate per annum (compounded quarterly). As his income is more than Rs 10 lakh per annum, his income will be taxed at 30 per cent rate under the old income tax regime. His interest earned on the fixed deposit will also be taxed at 30 per cent every financial year. On maturity, he will get Rs 40,931 from his fixed deposit (after the deduction of tax and cess).
Principal
Rs 150000
Interest
7%
Year
Principal at the beginning of the year (Rs)
Interest earned during the year (Rs)
Tax at 31.2%* (Rs)
Post tax return at the end of the year (Rs)
1
150000
10779
3363
7416
2
157416
11312
3529
7782
3
165198
11871
3704
8167
4
173366
12458
3887
8571
5
181937
13074
4079
8995
Total
40931
Post tax return from tax-saving FD: Rs 40931
Interest compounded quarterly
*Income tax at 30% and 4% cess
Now, if he invests the same amount in NSC during the April-June quarter at 7.7 per cent, here's how much he will get at maturity
Principal
Rs 150000
Interest
7.70%
Year
Principal at the beginning of the year (Rs)
Interest earned during the year (Rs)
Tax benefit you can claim (Rs)#
0
150000
11550
150000
1
161550
12439
12439
2
173989
13397
13397
3
187387
14429
14429
4
201815
15540
NIL
Total interest earned in 5 years (Rs)
67355.07
Interest compounded yearly
#Section 80C deduction
Interest earned in the fifth year will be taxed as per the tax bracket of the investor. So, the investor has to pay an income tax of Rs 4,848 in the final year, considering he is at 30 per cent tax bracket. So, post-tax return in the fifth year will be Rs 15,540-Rs 4,848 = Rs 10,692. So on maturity, the investor will get Rs 62,507 from his investment.
If you want to invest for saving income tax, you must compare the post-tax return on maturity of both the investments, not just the interest rate.
Tax-saving fixed deposit vs NSC: Where should you invest?
At this moment, NSC could fetch you higher return than popular banks’ fixed deposits. So, if you are looking to invest your surplus immediately then NSC gives better post tax return than most of the banks. However, as we are in a rising interest rate scenario bank fixed deposit interest rates may increase further. The rising rate may get more fuel if the Reserve Bank of India (RBI) hikes repo rate in its upcoming monetary policy committee meeting in June 2023. So, if you are planning to invest in the next three to six months then you may have some bank FDs giving higher return if the NSC does not witness a further rate hike.
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This story originally appeared on: India Times - Author:Faqs of Insurances
