Difference Between NSC (National Saving Certificate) and FD

National Saving Certificates (NSC) and Fixed Deposits (FD) are some of the most common investment instruments for elderly investors. Both of them have their own set of pros and cons.

Whereas a National Saving Certificate allows you to invest money in savings bonds issued by the government, a Fixed Deposit allows you to collect interest on the funds you save over a certain period of time. Now, which of these investment choices should you choose since they provide guaranteed1 returns?

Let's have a glance into what each choice has to offer.

What is National Saving Certificate?

National Savings Certificates (NSC) are savings bonds issued by the Indian Government that are generally utilised for modest savings as well as income tax-saving investments in the country. It is a component of India Post's postal savings scheme3.

An adult, a minor under a guardian's guidance, a trust, as well as two adults together can purchase them from any Indian Post Office. These are offered for five years and ten-year maturities. They can also be pledged as security to banking institutions in order to obtain credit. Income Tax Act Section 80C provides the bearer with tax advantages2.

What is a Fixed Deposit?

An FD or fixed deposit can be defined as a financial product offered by companies that pay investors a greater interest rate than typical savings account till the date of maturity. The institute may or may not require the account holder to create a different account. The rate of interest ranges from 4 to 7.50%. A Fixed deposit's term might range from 7 days, 15 days, or 45 days all the way up to 10 years4.

Fixed Deposit vs National Saving Certificate

Here are the main differences between Fixed Deposit and National Saving Certificates:

1. Investment Tenure:
One of the main factors that one might consider when looking for an investment is the tenure of that particular investment. National Saving Certificate or NSC comes with a pre-set term ranging from 60 months to 120 months. However, Fixed Deposits offer a wider range of investment terms ranging from only 7 days all the way up to 10 years.

2. Interest Rate:
The Indian government sets the rate of interest for National Saving Certificates over a particular period, and usually, it is higher than the rate offered by fixed deposits. While the rate of interest for fixed deposits is calculated every quarter year, the interest rates for National Saving Certificates are computed every half year.

3. Loans:
Both National Saving Certificates and Fixed Deposits can serve as collateral for loans in case of urgent financial needs.

4. Tax Breaks:
Among the most prominent tax advantages2 of investing in a National Savings certificate is that you may deduct up to INR 1,50,000 from your taxable income under Section 80C. The interest earnings from National Saving Certificates are not taxable for the initial 4 years when the amount is re-invested. However, the interest earned in the final fifth year is subject to taxation as it falls under the head of ‘Income from Other Sources. You may claim tax breaks on your deposits with a tax-saving Fixed Deposit. As per Section 80C, you can claim up to INR 1,50,000 in tax deductions2.

5. Withdrawal before Maturity:
Premature withdrawal from a National Savings Certificate will be permitted only under certain conditions. If the owner of the National Savings Certificate dies, the certificate is ordered to be withdrawn by the court of law. If a designated government officer relinquishes the plan, it becomes eligible for early termination. A Fixed Deposit, on the other side, can be liquidated before its tenure ends, but the owner would be penalised. A tax-saving FD cannot be liquidated with a premature withdrawal.

6. Safety of Investment:
National Savings Certificate, being an Indian government product, offer rates that seldom vary dramatically and represent the safest conceivable investment an individual can undertake in India. A fixed deposit is also another secure investment choice. It is frequently safer to participate in public sector Fixed Deposit plans rather than any private bank Fixed Deposit programmes.

To sum it all up,

How to Choose Between NSC and FD?

If you are still struggling with both National Savings Certificate and Fixed Deposit options available to you. These pointers can help you make your final decision.

1. Compare the amount of interest receivable instead of the rate of interest offered by the investment.
2. The rate of returns of National Savings Certificates is usually higher than Fixed Deposits.
3. The interest earned by National Savings Certificates on the final fifth is subject to taxation.

The Bottom Line

In conclusion, the National Savings Certificates and the Fixed Deposits are both safe instruments that allow you to save your money for a certain period of time without any risk. However, National Savings Certificates usually provide higher interest rates than most Fixed Deposits, so it is advisable to invest in National Savings Certificates instead of Fixed Deposits when you have a fixed amount of money that you can spare in an investment. The only catch is that you are given limited options to choose from in terms of maturity periods. If you have a shorter investment tenure (below 5 years), you can opt for Fixed Deposits from any banking or non-banking financial companies. This way, even though you have to pay taxes based on your interest income, you have the option to get a moderate amount of return on your investments.