NSC vs Bank FD: Where to Invest for Maximum Tax Benefits?

If investors are looking for safe and tax-saving investments, they can invest in these two popular options: the National Savings Certificate (NSC) and tax-saving Fixed Deposits (FDs) of banks. Both provide assured returns, tax relief under Section 80C, and a five-year lock-in period. However, they vary in the method of interest calculation and tax regulations, which affect the ultimate returns.

What is NSC?

The National Savings Certificate (NSC) is a safe and reliable savings scheme supported by the government. It is a good option for those people who want guaranteed returns and tax benefits. NSC help you to save money for the long term, with a fixed maturity period of five years.

Interest Rates of NSC vs FD

From January to March 2025, the NSC gives an interest rate of 7.7% per year, which is compounded annually. In comparison, many major banks offer tax-saving fixed deposit (FD) interest rates between 6.5% and 7.5% per year. For regular citizens, HDFC Bank and ICICI Bank offer 7% interest on tax-saving FDs. SBI and PNB provide 6.5%. DCB Bank provides the highest return at 8%, followed by IndusInd Bank and Yes Bank at 7.25% and Utkarsh Bank at 7.5%.

Tax Deduction at Source (TDS)

There is no tax deduction at the Source (TDS) for investments in NSCs. However, for fixed deposits, TDS is applicable if the interest received in a financial year is more than Rs. 40,000 for general investors and Rs. 50,000 for senior citizens.

Starting from the next financial year, the TDS limit will increase. General investors will have to pay TDS only if their interest crosses Rs. 50,000, while for senior citizens, the new limit will be Rs. 1 lakh.

How to Calculate Interest?

NSCs use the cumulative interest method, meaning the interest earned is reinvested and paid out only at maturity. The interest is compounded once a year.

Banks, however, provide two kinds of tax-saving FDs: cumulative and non-cumulative. In non-cumulative FDs, the interest is paid out quarterly. In cumulative FDs, the interest is compounded, allowing your money to grow.

A quarterly compounded bank FD will give a larger effective return than its nominal rate of interest a year. For example, if an FD earns a 7.5% rate of interest per year, its true annual return (following quarterly compounding) will be about 7.71%. That is marginally more than NSC’s 7.7% annual rate of interest that is compounded yearly.

Tax Benefits

Both NSC and tax-saving fixed deposits (FDs) qualify for tax deductions of up to Rs. 1.5 lakh under Section 80C. However, the way their interest is taxed is different:

NSC: The interest earned is taxable, but it is considered reinvested each year (except for the last year). Because of this, you can claim a deduction on the interest under Section 80C. However, in the fifth year, the interest is fully taxable and must be reported as “Income from Other Sources” in your tax return.

Tax-saving FD: The interest received is taxable in full as per your income tax slab. If you have more than one fixed deposit and the total interest received exceeds the TDS limit, tax will be deducted at the source (TDS).