NSC vs FD – Which is the Best Investment in 2024?

Investors worldwide look for low-risk, high returns, and tax efficiency when considering a new investment option. Everyone wants an investment portfolio that accelerates their financial growth and enables them to meet their goals faster. This article will discuss some lucrative financial instruments in the Indian market. The National Savings Certificate Scheme is an excellent example of an investment option everyone has heard of but no one knows the details about. Similarly, fixed deposits are pretty popular, but most investors are unaware of how to maximise their returns by choosing their FD investment wisely.

What is a Fixed Deposit?

A fixed deposit is a financial instrument wherein a depositor can invest a large amount with a bank at a fixed interest rate for a specified period. Upon maturity, the investor receives the principal amount and the accrued interest.

There are various kinds of fixed deposits to choose from. Investors can choose the fixed deposit that suits their financial profile by varying the investment amount, duration, and interest rate. Various FD options also offer tax benefits under section 80C.

What is a National Savings Certificate?

The National Savings Certificate is a fixed-income post office savings scheme offered by the government of India. Individual investors can purchase a national savings certificate scheme for as little as INR100. All you have to do is visit the local post office to buy the NSC. The duration of the NSC investment is five years, and the investment amount is locked in until then.

After five years, if a depositor wishes to renew the investment, they must purchase a fresh certificate at the prevailing interest rates. Currently, NSCs offer their investors a fixed interest rate of 6.8%. The interest is compounded annually, and you can avail of a tax benefit up to INR1.5 lakhs under 80C through an NSC investment.

Difference Between National Savings Certificates and Fixed Deposits

National Savings Certificates (NSC) have a longer investment duration but offer a variety of benefits, including tax advantages. Fixed deposits provide a substantially greater interest rate than savings accounts.

NSC vs FD

Difference National Savings Certificate Fixed Deposit
Liquidity The liquidity for an NSC is not very high. But you can use an NSC as collateral for bank loans. Fixed deposits do not offer liquidity and cannot be used as collateral for bank loans.
Interest Rate Fixed interest rate of 6.8% The interest rate on FDs varies depending on the bank and type of FD. But it is usually in the range of 6 to 8%
Compounding Frequency The interest rate for NSCs is compounded annually The interest rate for FDs is compounded quarterly
TDS Not applicable for NSCs A TDS of 10% is deducted on the interest earned on the FD
Minimum Investment INR100 is the minimum investment amount The minimum investment amount depends on your bank
Lock-in Period 5 to 10 years lock-in period The lock-in period ranges from 7 days to 10 years.
Premature Withdrawal Withdrawing prematurely is only possible under certain conditions You can withdraw the money only after five years if it is a tax-saving FD. In other FDs, you can withdraw prematurely with a penalty of 1%
Tax Benefits The interest earned is taxable. However, the interest is eligible for tax benefits under 80C. The interest earned is taxable but ineligible for benefits.
Loan NSCs can be used as collateral for bank loans but not for credit cards Fixed deposits can be used as collateral for credit cards but not for bank loans

 

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How to Choose Between NSC vs FD?

Choosing an investment avenue requires careful consideration of all the pros and cons and calculating which investment helps you attain your financial goals quickly. In this case, a national savings certificate vs. fixed deposits is a comparison of two equally lucrative investment instruments. Depositors should consider the following points –

  • In many cases, FDs offer a higher interest rate than NSCs. As mentioned above, NSCs have an interest rate of 6.8%, while FDs can provide up to 8% interest rates.
  • The interest earned on FDs is taxable. The bank deducts a TDS of 10% on the interest earned. There is no TDS deduction for NSCs.
  • Due to TDS, the total interest yield on maturity by FD may be lower than the total interest yield by NSCs.
  • Senior citizens can avail of a higher interest rate from banks on FDs. Senior citizens can also get an exemption from TDS by submitting forms 15H or 15G. NSCs have no preferential rates for senior citizens.
  • The interest earned on both these instruments is accrued and not paid out.
  • Premature withdrawal is possible in fixed deposits, albeit with a penalty – but not possible at all with NSCs

Ultimately, we can say that NSCs are more suitable for long-term financial goals wherein the investor is sure they don’t need liquid funds for at least the next five to ten years. On the other hand, fixed deposits are a better choice for those who want to grow their savings quickly within a few years while maintaining the option of premature withdrawal. Hence, one should choose an investment instrument based on their financial objectives, investment horizon and risk tolerance levels.