Many risk-averse investors put money into a 5-year fixed deposit to avail of tax deduction under Section 80C of the Income Tax, 1961. The allure of a term deposit has increased in the past few months as the Reserve Bank of India (RBI) increased repo rates by 140 basis since April this year. Most banks now offer a maximum FD rate of 6% and higher and give a premium of 50 basis points to senior citizens.
But should you opt for these FDs for the purpose of saving tax? If your answer is yes, then you might want to take a look at the Department of Posts’ National Savings Certificate (NSC). The post office scheme, which has a maturity of 5 years offers an interest rate of 6.8 % compounded annually but payable at maturity. Deposits in the NSC also qualify for deduction under section 80C of the Income Tax Act, making the investment scheme a much better choice than a bank FD.
Other than interest rate, tax-saving FDs and NSC differ from each other on some key criteria. Here are the key differences you should know before selecting one of these instruments for the purpose of tax-saving.
– In tax saver FDs, the investor has an option to receive interest either monthly or annually. But in NSC, regular interest payments are not made, instead, the interest is paid at maturity. In NSC, you will receive the interest amount along with the principal amount after the maturity period of five years.
In NSC, interest accrued for the first four years is reinvested and qualifies for tax deduction under Section 80C for the initial four years. So, the investor get 80C deduction on the interest amount for four years. In the fifth year, the investor gets the interest earned during the five-year tenure.
-The maximum amount that can be invested in a financial year in both NSC and tax-saving FD is Rs 1.5 lakh.
The amount that you invest in both NSC and tax saver FD remains locked in for five years. Investors cannot pre-maturely withdraw the amount from any of the schemes. However, the biggest benefit of NSC is that it can be mortgaged in a bank for taking a loan in case of an emergency. But tax-saving FD can not be mortgaged for taking a loan.
-The interest earned on both tax-saving FD and NSC is fully taxable. The interest amount gets added to the taxable income of the investor and is taxed as per his/her slab. So, one should look at post-tax returns from both before investing. For individuals in the higher tax slab net returns will be lower.
