Saving money is on everybody’s bucket lists, right? However, accomplishing this goal is a task that a very few people have the perseverance to pursue. You keep some amount aside, determined to save it BUT as soon as month-end nears and your empty pockets and irrational cravings take a toll, you give in.

To rescue you and your money from such unfortunate situations, two main investment instruments are FDs and Mutual Funds. Come, let’s learn about them.

what is fd

Table of Content

What is FD?

Fixed deposits are investment instruments offered by banks and non-banking financial companies, where you can deposit money for a higher rate of interest than savings accounts. You can deposit a lump sum of money in fixed deposits for a particular period, which could range from 7 days to 10 years.

Once you invest the money with a reliable financier, it begins earning an interest depending on the duration of the deposit. Generally, the basic defining criteria for FD is that the money invested cannot be withdrawn before maturity, however, you could withdraw after you pay a penalty.

What are the features of FDs?

Following are the Key features of FDs.

  1. Offer stability,
  2. There is no risk of loss of principal,
  3. The market fluctuations do not affect your FDs
  4. The interest rates are higher.

Banks have the authority to refuse to repay FDs before the expiry of the deposit, but they generally do not take such an action. This early withdrawal of an FD is known as a premature withdrawal. In such cases of withdrawal, interest is paid at the rate applicable at the time of withdrawal.

Let us give an example – a deposit is made for 5 years at 8%. However, it is withdrawn after 2 years. If the rate applicable on the date of deposit for 2 years is 5 per cent, the interest will be paid at 5 per cent.

Makes more sense now, right? Also, there’s something you should keep in mind – banks may charge a penalty for premature withdrawal.

mutual fundsWhat is Mutual Fund?

A mutual fund is formed when capital collected from different investors is invested in company shares, stocks or bonds. Shared by thousands of investors like you, a mutual fund is managed collectively to earn the maximum possible returns.

The total corpus of money that builds up is invested in various asset classes of any type, be it debt funds, liquid assets etc. The principle feature of mutual funds is that exactly like gains and rewards that are earned over the period of investment are shared by the investors in equal proportion, the losses are too. The distribution is done in accordance with their ratio of the contribution made in the corpus.

What are the Types of Mutual Funds?

The money in the funds is well regulated by SEBI, or the Securities and Exchange Board of India. They are generally of three types:

  1. Equity funds.
  2. Debt funds.
  3. Hybrid funds.

Mutual funds offer expert money management, systematic investment planning along with diversification. They usually yield much higher returns than FDs.

what is sip,sip

What is SIP?

A SIP, better understood as Systematic Investment Plan is a smart and hassle-free way of investing money in mutual funds. SIP permits you to invest a certain amount (which is pre-determined) at a regular period of time which could be weekly, monthly, quarterly, etc.

A SIP is a planned and a systematic approach towards investments and helps you pick up the amazing habit of saving and building wealth for the future.

SIP is an easy and a flexible investment plan.

In a nutshell, your money is auto-debited from your bank account and invested into a specific mutual fund scheme. You are allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day. Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.

To start investing in a SIP, firstly we need to set our financial goals. Then, we need to fix a timeline, i.e., our investment tenure.

After that comes the main part – using the SIP calculator to decide how much money you are capable of investing in order to achieve your financial goals.

Last but not the least, you can consult an advisor and choose a plan that meets your needs well.

What is RD?

A Recurring Deposit or RD as it is more preferably referred to is a unique term deposit offered by banks. It is an investment instrument which allows those investors with an ability to make regular deposits earn decent returns on their investment.

Basically, consisting of regular periodic deposits and an interest component, a Recurring Deposits provides flexibility and ease of use to the investors. Account bearers have the liberty to choose to invest a particular amount each month, alongside ensuring that they have sufficient income for an emergency, with the RD earning decent interest on the amount. Given the fact that FDs are rigid and are not ideal for short terms, a Recurring Deposit is an ideal investment cum savings option.

Almost all the banks in India offer an RD scheme, with the rates being highly competitive.

What is the interest rate of RD (Recurring Deposit)?

Interest rates on RD schemes are an aggregate of 6-7% with the interest depending on the market trends prevalent at the time at which the account was created. Once you open an account and start investing, the interest will remain constant for the duration chosen by you. The tenure of an RD can vary from 6 months to 10 years. This is the prime reason why RD schemes make a great choice for salaried individuals who earn a fixed income every month and are more comfortable in investing a regular amount every month.

When the RD account is opened, the maturity value is indicated to the customer assuming that the monthly installments will be paid regularly on due dates by him/her. However, if any installment is delayed, the interest payable in the account might be reduced and will not be sufficient to reach the maturity amount promised.

Therefore, the difference in interest will be deducted from the maturity value as a penalty. The rate of penalty will be fixed upfront. Interest is compounded on quarterly basis in RD accounts.

Why debt mutual funds are better than fixed deposits?

For those who are aloof, a debt fund is a type of mutual fund which invests most of the money gathered from investors into fixed income instruments like corporate bonds, government bonds (both state and central), bonds issued by banks, certificate of deposit, treasury bills etc.

These mutual funds are best suited for investors who have a significant risk appetite, nonetheless not wanting to invest in the stock market. 
For a long time now, Indians have preferred FDs as their go-to investment options. However, with increasing awareness and exploration of better options by the current generation, mutual funds are paving their way to become the favorite investment platform. Here’s why:

  1. Returns on Investment

    Mutual Funds: These usually yield returns in the range of 7-9% per annum.

    FDs: After demonetization, many banks decreased the FD rates owing to the excessive liquidity. For an example, State Bank of India (SBI) presently offers 6.8 % for one-year deposits, compared to 8% in 2015. For a 3-year deposit, it is at 6.80%.

  2. Taxation.

    Mutual Funds: a) Short term capital gain tax – Applies to debt mutual funds which are held for a period of 36 months or lesser. b) Long term capital gain tax – Applies to debt mutual funds which are held for a period of anything more than 36 months.

    FDs: The amount of interest earned from Fixed Deposits is combined with your annual income for taxation purposes. Hence, the tax rate on interest earned from FDs will depend on your income tax slab, i.e. 5 %, 20 % or 30 % on the interest received.

  3. Liquidity.

   Mutual Funds: Debt funds/Mutual funds proceeds are credited within a period of 2-3 working days. The credit period depends on various factors such as whether an Electronic Clearing Services (ECS) mandate is registered.

FDs: FDs too are generally available at 1-2 days’ notice, but possibly carry a penalty along if they are redeemed before the maturity date. Premature withdrawal of FDs is penalized by the banks by paying lower interest rate than the original promised interest rate. However, premature withdrawal is not allowed in tax saving fixed deposits owing to the fact that they have a lock-in period of five years.

4. Availability of options.

Mutual Funds: There is a wide variety of debt funds in the market for people to invest in. You can choose from them, depending on your risk appetite, your need for liquidity and other investment goals.

FDs: This feature is not available with FDs.

Here’s some additional information to a comparison chart of Mutual Funds and Fixed Deposits,

ParametersMutual FundsFixed Deposits (FD)
Rate of ReturnsNo assured returnsFixed returns
Inflation Adjusted ReturnsPotential for high Inflation-adjusted returnsUsually low Inflation-adjusted returns
RiskMedium to highLow
LiquidityHighMedium to low
Premature WithdrawalAllowed with exit loadAllowed with penalty
Cost of InvestmentManagement CostNo Cost
Tax StatusFavourable tax statusAs per tax slab

How SIP is better than FD? And why?

Although FDs are the safest and the most reliable option available to investors when it comes to investing the hard money without giving a second thought, investing in mutual fund SIPs is also not that bad a choice, even better, in fact.

It definitely proves beneficial if the decision to invest is taken after taking all risks into account. With the interest rates on FDs slashed by the banks recently, both conservative and assertive investors can do prior research on investing in mutual fund SIPs which may result in higher returns on the investments made. Let’s take a look so as to why SIP is better than FDs:

  1. Investment amount

    It is simple and easy to start investing in both the financial instruments, if we look at the investment type available to potential investors with regard to SIPs and FDs. Nonetheless, considering the rates that they offer, it is comparatively easier when it comes to SIPs because you can start with a small amount and still have a chance to earn higher returns if the companies in which the investments have been made are reaping profits.

  2. Interest rates:

    Given the fact that the rates of interest offered in SIPs are higher when compared to that of FDs, it does assure a potential investor of great returns. Although, this is not enough. When one invests in SIPs, it is up to pure luck when it comes to guaranteed returns. Nonetheless, by choosing a great financial advisor and taking a smart decision, the risks can be deflated significantly. While in the case of FDs, the investor is sure to get higher returns irrespective of the sum he/she has invested in the FD.

  3. Taxes:

    When it comes to the important topic of tax saving, tax is levied on most FDs on the basis of the income tax slab that the investor falls under. Though, all the FDs charge taxes on the individuals, there is one type of FD called tax saving FD where the investors can claim deductions on investments up to Rs. 1.5 lakh. Talking about the SIPs, although no tax is charged if the mutual funds units are sold after a year, a certain percent of tax is levied on the investors.

is fd tax free or not

1) Is FD exempted from tax? Does FD save tax?

No, FDs are not totally exempted from tax.

However, they do help you save tax to a certain extent. According to the current income tax laws, under Section 80C of the Income Tax Act, you can claim deduction for investments up to Rs 1.5 lakh in a financial year in tax-saving fixed deposits (FDs). The amount so invested is to be deducted from gross total income to arrive at taxable income.

2) Is FD good investment?

If you have zero tolerance for risks and you’re okay with lesser returns and higher taxation schemes, Fixed Deposits are totally your thing. If for you, steady income is preferable to bursts and spurts, then FD is definitely the right investment option for you. You get all of your principal in case of any withdrawals, which might or might not be the case in Debt funds.

The interest rates are constant, assuring you of uniform returns irrespective of the market fluctuations.

3) Is recurring deposit tax-free under 80c?

To answer in a single word, No.

Recurring deposits do not come under the ambit of deduction under section 80C. Moreover, even if you invest in RD for a period of more than 5 years, even then it cannot be claimed as a deduction under section 80C. In order to claim deduction under section 80C, you should invest in Fixed Deposits.

The money that is invested in a recurring deposit every year, will be counted as a part of the yearly income of the investor.

A TDS (Tax Deducted at Source) of 10 percent is deducted on the interest you earn on your recurring deposit. The TDS is not deducted if the interest you earn on your recurring deposit is up to Rs.10,000. The TDS will be 20 percent, if you do not provide the PAN information to the bank.

4) Which is Better FD Or Recurring Deposit? Is FD better than RD?

Here are a few major differences between FDs and RDs, that would help you understand these investment options and their uses better.

  1. Tenure

    FD: Usually, for FD schemes, the tenure ranges between 7 days to 10 years. The investor can choose a tenure that suits his investing scheme the best.

    RD: Tenure for Recurring deposits usually vary from 1 year to 10 years. The customer has to deposit a fixed amount at regular intervals over the period.

  2. Investment limit

    FD: There is no limit on the amount that can be invested in a fixed deposit scheme. This limit generally depends on the bank and the minimum investment is usually Rs. 100 and multiples while the maximum limit is Rs. 1.5 lakh.

    RD: While there is no prescribed minimum or maximum limit, this generally depends on the bank too. Many banks have the minimum investment limit as Rs. 1000 and the maximum limit as Rs. 15 lakhs per month, but this may not be generalized.

  3. Rate of Return

    FD: For a period of a year, the interest rate varies between 6.96% to 8.00%. The interest rate depends on the capital and tenure opted for. The interest rate for FD is slightly more than that of RD.

    RD: The interest rate varies between 5.25% to 7.90% for a period of one year. The rate of interest usually depends on tenure and monthly investment amount.

  4. Tax benefits

    FD: For fixed deposit, a tax exemption under the section 80C of Income Tax Act 1961 is applicable.

    RD: Income tax will be not deducted if the interest you earn on your RD is up to Rs.10,000.

  5. Income interest

    FD: Interest earned on your FD is taxable and most of the banks deduct TDS.

    RD: Interest earned on your RD is taxable and most banks do not have the facility of deducting TDS.

    FeaturesFixed Deposit (FD)Recurring Deposit (RD)
    TenureUsually, the tenure ranges between 7 days to 10 yearsUsually vary from 1 year to 10 years
    Investment LimitNo limit as such. Minimum investment is Rs. 100 and multiples while the maximum limit is Rs. 1.5 lakh.No limit as such. Minimum investment limit is Rs. 1000 and the maximum limit is Rs. 15 lakhs per month.
    Rate of ReturnVaries between 6.96% to 8.00%Varies between 5.25% to 7.90%
    Tax benefitsTax exemption under section 80C of Income Tax Act 1961 is applicableIncome tax will not be deducted if the earned interest is up to Rs.10,000
    Income InterestInterest earned is taxableInterest earned is taxable
    Additional BenefitsLoan Facility
    EligibilityResident Individuals
    Hindu Undivided Families
    Public and Private Limited Companies
    Trusts and Societies
    Resident Individuals
    Trusts and Societies
    Hindu Undivided Families
    Public and Private Limited Companies
    WithdrawalPremature withdrawal is allowed with penaltyPremature withdrawal is allowed with penalty

5) Which is Better SIP or Recurring Deposit? Is SIP better than RD?

By now, you know that SIP is an investment option for mutual funds while RD is for depositing money in bank fixed deposits. Let’s study the differences between them in detail so that we can make a better choice with our money, shall we?

  1. Investment Scheme

    RD: In a RD scheme, you will have to invest in a deposit plan that will provide you fixed rate of returns. There is also an option of flexible recurring deposit scheme if you are looking for more flexibility.

    SIP: In SIP for mutual funds, you can choose between debt or equity type of funds depending on your risk appetite.

  2. Risk Factor

    RD: Recurring Deposits are not prone to risks and is one of the safest tools of investment.

    SIP: Returns expected from the SIP are variable. There can be a risk of capital and returns depending on the stock market. However, the recent data shows us the SIP gives good returns if held for a long period of time.

  3. Investment Type

    RD: In a Recurring deposit scheme, the investor has to deposit a fixed amount every month.

    SIP: It is a way to invest your money in the mutual funds. Investment can be done on a periodic basis that suits you the best, it might be daily, weekly, monthly or quarterly.

  4. Returns

    RD: As the rate of interest is fixed in a recurring deposit scheme, the return is also fixed and known beforehand, at the time of investment.

    SIP: The returns from a SIP for mutual funds is dependent on debt and equity markets and is generally based on the fund scheme chosen by the investor.

  5. Liquidity

    RD: Recurring Deposit is liquid but premature withdrawal or closure might be subject to penalty charges.

    SIP: In terms of liquidity, SIO has an upper hand when compared to RD. SIP can be closed and the money can be withdrawn at any time, without any penal charges.

  6. Taxation

    RD: Recurring Deposit amount or the interest earned on it are not exempted from tax.

    SIP: SIP investments and returns are exempted from tax only when invested on Equity Linked Savings Scheme (ELSS) funds. Nonetheless, when you invest in equity mutual funds and stay invested for period of at least one year, the monetary gains earned are tax free. If you sell the equity mutual fund units before a year, the gains will attract a short-term capital gain tax @15%.

  7. Installment Frequency

    RD: Recurring Deposit usually come with monthly instalments.

    SIPs offer flexible instalment plans of daily, weekly, monthly, quarterly etc.

  8. Investment Goal

    RD: Recurring Deposits are usually meant for short-term savings goal and do not aid in long-term wealth growth.
    SIP: SIPs can help in all kinds of investments goals, whether short or long-term, depending on the frequency of investment, funds chosen and various other factors.

6) Can I withdraw money from RD account before maturity?

In one word, Yes – you can withdraw your RD amount before the maturity date. For the same, you have to approach your branch personally and ask for a before mature application form, fill it up with required details and submit it along with the RD passbook to the concerned officer at the branch.

After completing all the formalities, the bank will break your RD and transfer the amount to your SB or Current A/C. In this condition, the interest shall be paid at the rate that is applicable during the time of the deposit, only for the time for which the concerned deposit has been remained with the bank.

The premature breaking of the RD also follows a penal rate of interest as directed by the bank on the very date of the deposit, which is generally 1%. In SBI, for retail Term Deposits up to Rs 5.00 lacs, the prepayment penalty will be ‘NIL’ provided the deposits have remained with the bank for at least 7 days.

Hence, while choosing to invest in a recurring deposit account, select a bank that offers high rate of interest and charges a low fee on premature withdrawal.

7) Can we close RD account before maturity in post office?

Both Yes and No.

If your maturity period is more than three years (5 years/10years/etc.) then you might close your account after three years of its opening. However, you will not receive the RD interest rate on such premature closure account. Instead, the Post Office will pay you by the savings account interest rate.

Nonetheless, premature closure is not allowed until the period for which the advance deposit made in cases of advance deposit in RD.

Keep in mind that a post office recurring deposit account can only be closed after completing at least three years from the date of its opening.

8) Is Post Office RD tax free?

Interest earned on post office RDs or FDs is taxable under ‘Income from other sources.’ Even if the tax is not deducted on the aforesaid interest, it should be offered to tax by the investor. You would be eligible for tax deduction under Chapter VI-A of the Act for specified investments or expenditure from the total income. However, re-investment of post office FD interest into RDs does not qualify for any tax deduction under Chapter VI-A of the Act.

In the case of Postal RD, the provisions of TDS will not be applicable. Hence, the onus is on the taxpayer to offer it as income and pay tax. The postal RD tax would not be deducted by post office unlike the bank RD where the interest is subject to tax deduction. Interest earned on recurring deposit is outside the purview of section 80TTA, therefore the taxpayer cannot take shelter under that section too.

Moreover, postal RD does not qualify for 80C deduction.

9) What is the maximum limit for fixed deposit?

Minimum amount to be deposited in Fixed Deposit Accounts varies from banks to banks and ranges from RS.1000 to Rs. 10000.For example, in SBI fixed deposit, the minimum amount to be deposited is Rs.1000 and for HDFC it is about Rs.5000.

There is no upper limit or maximum limit for FDs if one is a legal tax payer with a legitimate source of income.

10) Is FD taxable on maturity?

By now, you might be very well aware of the fact that FDs are not tax free.

For those who are aloof of the term TDS, it stands for tax deducted at source. As per the Income Tax Act, any company or person making a payment is required to deduct tax at source if the payment exceeds the defined threshold limits. We need to know this term to understand the upcoming concepts.

The bank would deduct TDS on the interest earned by your FD, however the interest is calculated without involving the principal amount. (We know you’re smart enough to know that, but just in case!). There are certain conditions:

  1. When does the bank not deduct TDS?If your interest income from all FDs with a bank is less than Rs 10,000 in a year, the bank does not deduct any TDS.
  2. When does the bank deduct TDS @ 10%?Bank deducts TDS @ 10% from your interest income when it exceeds Rs 10,000 in one financial year. The bank will estimate your interest income for the year from all the FDs you have with the bank and if it exceeds Rs 10,000, they will deduct TDS @ 10%.
  3. When does the bank deduct TDS @ 20%?In case you do not provide your PAN information to the bank, they will deduct TDS @20%. So, do make sure your bank has your PAN details.
  4. No TDS is deductible when your total income is less than minimum taxable amountIn the case of housewives or senior citizens, it may be possible that their interest income in a year is more than Rs 10,000 but their Total Income (including interest income) is less than the minimum exempt income (Rs 2,50,000 for financial year 2017-18). Since no tax is payable by the individual, no TDS should be deducted by the bank. But how will the bank know your total income? The only way to make sure that no TDS is deducted by the Bank is by submitting Form 15G and Form 15H to the Bank.

Interest from FD for senior citizens

By way of an amendment vide Finance Act 2018, interest income from FD, savings account and recurring deposits received by senior citizens would be exempted from income tax up to the maximum amount of Rs 50,000.

11) How is tax calculated on FD?

Banks deduct TDS on interest only if the interest amount for an F.D is greater than Rs.10,000 per year. The rates of the income tax slabs range between 0% and 30%.

If your total income is below the minimum tax slab (10%), the TDS on FD interest that is deducted by banks can be recovered. It can be done by claiming a refund for the TDS amount at the time of tax filing.

On the other hand, you can submit the “Form 15G” to the bank declaring that since your taxable income for the year will be below the minimum tax slab, the bank shouldn’t deduct TDS on your FD Interest.

Senior Citizens are also exempted from paying TDS on FD interest as a special concession by the IT department. They need to submit Form 15H to ensure they aren’t charged TDS on their F.Ds.
Individuals in higher tax brackets like 20% or 30% need to pay Self-Assessment Tax over and above the TDS deducted on their interest income.

Also, here’s something important that you shouldn’t miss out. According to Section 206AA, if the interest to be paid by the bank is greater than Rs.10,000 and the Permanent Account Number has not been submitted by the individual, TDS of 20% will be deducted. This step is taken so that all individuals are encouraged to submit their PAN details.

12) Can we withdraw money from fixed deposit before maturity? & What happens to fixed deposit after maturity?

A premature withdrawal of fixed deposit is when a person wants to withdraw this money before the expiry of the period for which it was invested. You would be paid back the principal amount as well as the interest, either at a lower rate of interest or after deducting a penalty.

However, as per recent RBI regulations, a bank can also offer fixed deposits with lock-in i.e. the bank can refuse any withdrawal before the maturity period.

Before pre-mature withdrawal you should know two things.

  1. Lower rate of interest:

    The rate of interest is fixed for the entire tenure of FD. In case, of premature withdrawal interest will be paid not as per the original rate but at the interest rate applicable on the date of deposit.
    Some bank FDs have minimum lock-in period. If you withdraw your FD before the lock-in period, no interest is payable to you.

  2. Premature closure penalty

    Penalty of .5–1% lower interest might be levied as premature close penalty. A fixed deposit gets renewed automatically if not withdrawn on maturity or the interest rate of savings account is paid for period after maturity.

Therefore, while opening an FD, you have 2 options:

First, after maturity the amount could be transferred to a specific savings bank account. The account number and bank details should be provided to the bank in such conditions.

Second, the depositor can indicate in the form that the amount be renewed after maturity. The longest tenure for FD is 10 years.

13) Which bank is best for RD? What is RD interest rate?

The interest rates on RDs depend on the category you fall under and your choice among different banks. Also, senior citizens earn a higher rate of interest when compared to regular citizens. There are schemes offered to minors, students and parents to save for the children. The current interest rates available from different banks generally range between 4.5% and 7.90% per annum.

The banks offering the best interest rates on RD accounts (as of January,2019) are:

  1. SBI Recurring Deposit: Normal Interest rates: 6.80% – 6.85% & Senior citizen rates: 7.30% – 7.35%
  2. HDFC Bank Recurring Deposit: Normal Interest rates: 6.25% – 7.40% & Senior citizen rates: 6.75% – 7.90%
  3. ICICI Bank Recurring Deposit: Normal Interest rates: 6.25% – 7.50% & Senior citizen rates: 6.75% – 8.00%
  4. Axis Bank: Normal Interest rates: 7.00% – 7.60% & Senior citizen rates: 7.35% – 8.25%
  5. Kotak Bank: Normal Interest rates: 6.50% – 7.30% & Senior citizen rates: 7.00% – 7.80%

14) Which bank is best for FD? What is FD interest rate?

The interest rate on fixed deposits of any period less than one-year tenure by most of the reputed banks is in between 5.5% and 6.75%.

Here are the banks with the best FD interest rates:

  1. IDFC Bank: Tenure: 91 days to 180 days Interest rate (%): 6.75
  2. Kotak Mahindra Bank: Tenure: 181 to 363 days Interest rate (%): 6.5
  3. SBI: Tenure: 180 to 210 days Interest rate (%): 6.35
  4. Axis Bank: Tenure: 6 months to 8 months 29 days Interest rate (%): 6.25
  5. ICICI Bank: Tenure: 61 days to 184 days Interest rate (%): 6

15) Which bank is best for Fixed Deposit for 5 years?

Five years seems to be an optimum time to invest your money in FD, right? However, with the plan of investment comes the next big question – Which bank to select? You can choose from a wide range fixed deposits (FD) that offer a high rate of interest for a period of 5 years.

We are here to make the job easier for you, here are the best interest rates offered by banks for a period of 5 years on FDs:

  1. IDFC Bank
    Interest rate(p.a.): 7.20%
    Senior citizens: 7.75%
  2. Axis Bank
    Interest rate(p.a.): 6.90%
    Senior citizens: 7.40%
  3. Yes Bank
    Interest rate(p.a.): 6.75%
    Senior citizens: 7.25%
  4. ICICI Bank
    Interest rate(p.a.): 6.50%
    Senior citizens: 7.00%
  5. SBI
    Interest rate(p.a.): 6.00%
    Senior citizens: 6.50%

10. What is NSC?

The National Savings Certificate is a fixed income investment scheme that you can open with any post office. A Government of India initiative, it is a savings bond that encourages subscribers (mainly small to mid-income investors) to invest while saving on income tax. A fixed income instrument like Public Provident Fund and Post Office FDs, this scheme too is a secure and low-risk investment option.

NSCs come with 2 fixed maturity periods – 5 years and 10 years. There is no maximum limit on the purchase of NSCs, but investments of up to Rs 1.5 lakhs in the scheme can earn a tax break under Section 80C of the Income Tax Act. The certificates earn a fixed interest, which is currently at the rate of7.6% per annum. They add this interest back to the investment and compound it annually. Many pledge these certificates for taking loans from banks.
Hindu Undivided Families (HUFs) and trusts, along with non-resident Indians (NRI) cannot purchase NSC certificates. The scheme is open to only Indian individual citizens.

11) NSC vs 5-year bank FD: Which is a better tax-saving investment? and WHY?

Both NSCs and 5-year FDs are good investment options, with lower risk appetites and steady returns. However, if one must differentiate, these two have significant differences that make them stand apart from each other. Let’s have a look at them right away, shall we?

1. TDS Deduction

There is no TDS deduction done in NSCs while in FDs, TDS is deducted. The TDS is deducted at the rate of 10 per cent in case interest accrued or paid out exceeds Rs 10,000 in a financial year. The limit of Rs 10,000 is set for each bank and not on each branch. If the PAN of an investor is not available, then the TDS will be deducted at 20 per cent.

2. Liquidity

NSCs can be used as collateral for loan whereas FDs cannot be used as collateral for loan. NSCs can be pledged as security to get a loan.

3. Compounding frequency

The compounding frequency for NSCs is Annually, whereas for FDs it is Quarterly.

5. Re-investment of interest earned

The 5-year FD comes with a cumulative and a non-cumulative option. In the non-cumulative method, the monthly interest earned is paid to the investor and, in case of cumulative, it is reinvested in the FD. In the case of NSC, the interest earned is reinvested (cumulative method) and there is no option to get it paid to you until maturity. While interest earned from both the instruments is taxable as per income tax law (under the head ‘income from other sources’), the interest earned in NSC (for the first four years) is eligible for tax benefit under section 80C. This benefit is cannot be enjoyed in a 5-year FD.

NSC vs Tax-Saving FD

Features National Savings Certificate (NSC) Fixed Deposits (FD)
TDS Deduction No deduction TDS is deducted
Liquidity Can be used as collateral for loan Cannot be used as collateral for loan
Compounding Frequency Annually Quarterly (Generally)
Interest Rate 8% for the quarter Oct-Dec, 2018 SBI – 6.85%

HDFC & ICICI – 7.25%

IDFC – 8.25%

There are various similarities between NSCs and 5-year FDs too, which are:

  1. Lock-in period: Five years
  2. Tax benefit: Investment qualifies for tax break under section 80C up to Rs 1.5 lakh
  3. Income earned is fixed: Interest rates are locked for duration of investment and are not subject to volatility
  4. Tax on interest earned: Interest earned is taxable under the head ‘Income from other sources
  5. Maximum Investment limit: There is no limit on the maximum amount for investment
    With the above similarities and differences, you can judge that an NSC-VIII issue could fetch better returns on maturity due to a higher interest rate when compared to 5-year tax saving FD and, comes with better tax benefits.

However, the choice of investment also depends on whether your need is long term or not. For example, if you are a senior citizen, you can earn monthly income during your retirement from the monthly non-cumulative interest payments made on 5-year FDAs. Banks also offer higher interest rates to senior citizens.

What is the difference between National Saving certificate (NSC) vs Equity Linked Savings Scheme (ELSS)?

Minimum investmentRs 100Rs 500
Maximum investment (can be claimed as tax deduction)Rs 1 lakhRs 1 lakh
Tenure5 and 10 years3 years
Risk factorLow riskHigh risk, depending on markets
Interest rate8.5% pa for 5 year term & 8.8% pa for 10 year termNo fixed interest rate
Frequency of interest accumulationInterest is compounded half yearlyNA – depends on market conditions
Fixed returnYesReturns are not fixed
Income Tax deduction applicable?Yes, under Section 80C of IT ActYes, under Section 80C of IT Act
Tax liabilityInterest earned is taxableAmount received at end of maturity is not taxable

What is the difference between Equity Linked Savings Scheme (ELSS) vs National Savings Scheme (NSC) vs Fixed Deposits (FD)?

Particulars ELSS NSC FD
Investment Amount 500 to No Limit 100 to 1,00,000 100 to 1,50,000
Lock-in Period 3 years 5 & 10 years 5 years
Tax on Returns Tax Free Taxable Taxable
Expected Returns 10-15% (market linked) 6.96% – 8%
Risk High Risk Low Risk Low Risk
Loan Facility Partial loan after 3-year lock-in period Yes No loan option available
Tax Benefit Yes Yes Yes

Happy saving! 🙂



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