NSC vs Bank FD: Where to Invest to Save Tax & Get Maximum Benefits

Wondering whether to invest in NSC or Tax-Saving FD? This guide compares their interest rates, tax benefits, liquidity, and security to help you make an informed decision. Read now to choose the best tax-saving investment for 2025!

By Praveen Singh
Published on
NSC vs Bank FD: Where to Invest to Save Tax & Get Maximum Benefits
NSC vs Bank FD

When it comes to tax-saving investments, two popular choices among Indian investors are the National Savings Certificate (NSC) and Bank Fixed Deposits (FDs). Both offer tax benefits under Section 80C of the Income Tax Act, but they differ in terms of interest rates, tax treatment, liquidity, and overall returns.

NSC vs Bank FD

FeatureNational Savings Certificate (NSC)Bank Fixed Deposit (FD)
Interest Rate7.7% (as of Q1 2025)6.5% – 8% (varies by bank)
CompoundingAnnuallyQuarterly (in most banks)
Tax BenefitDeduction under Section 80CDeduction under Section 80C
Tax on InterestReinvested and deductible (except final year)Fully taxable
Lock-in Period5 years5 years
LiquidityNo premature withdrawal (except special cases)No premature withdrawal
Risk FactorGovernment-backed, low riskInsured up to ₹5 lakh per depositor per bank (DICGC)
Minimum Investment₹100Varies by bank (₹1000 or more)
Where to BuyPost offices, selected banksBanks (online & offline)

Both NSC and Tax-Saving Fixed Deposits are excellent investment options for tax-saving under Section 80C. However, the choice depends on your priorities:

Choose NSC if you prefer government security, tax-efficient interest, and lower investment limits. Choose a Tax-Saving FD if you want quarterly compounding, better bank rates, and flexible investment options.

What is the National Savings Certificate (NSC)?

The National Savings Certificate (NSC) is a government-backed savings scheme designed to encourage small and middle-income investors to save money while enjoying tax benefits. It is available at post offices and selected banks and is a secure, fixed-income investment option.

Key Features of NSC:

  • Offers 7.7% annual interest (as of Q1 2025).
  • Interest is compounded annually but payable only at maturity.
  • Lock-in period of 5 years.
  • Investments qualify for tax deductions under Section 80C.
  • Interest is taxable but considered reinvested (except in the final year).
  • Minimum investment starts at ₹100, and there is no upper limit.

Example of NSC Returns

If you invest ₹1 lakh in NSC, here’s what your returns will look like:

  • Year 1: ₹1,07,700
  • Year 2: ₹1,15,946
  • Year 3: ₹1,24,848
  • Year 4: ₹1,34,450
  • Year 5: ₹1,44,796 (Total maturity amount)

see also: How to Invest in Post Office Fixed Deposit

What is a Tax-Saving Bank Fixed Deposit (FD)?

A tax-saving fixed deposit (FD) is a special type of bank FD that offers tax benefits under Section 80C of the Income Tax Act. It is available in most Indian banks and comes with a 5-year lock-in period.

Key Features of Tax-Saving FD:

  • Interest rates range from 6.5% to 8%, depending on the bank.
  • Interest is compounded quarterly in most cases.
  • Lock-in period of 5 years (no premature withdrawal allowed).
  • Minimum investment usually starts from ₹1,000.
  • Investments qualify for tax deductions under Section 80C.
  • Interest is fully taxable as per your income tax slab.

Example of FD Returns

If you invest ₹1 lakh in a tax-saving FD at an interest rate of 7.5%, here’s how much you will earn:

  • Year 1: ₹1,07,689
  • Year 2: ₹1,15,809
  • Year 3: ₹1,24,386
  • Year 4: ₹1,33,449
  • Year 5: ₹1,43,027 (Total maturity amount)

NSC vs Bank FD: Which One is Better for You?

1. Interest Rates & Compounding

  • NSC: 7.7% compounded annually.
  • Tax-Saving FD: 6.5% – 8% compounded quarterly. Winner: FDs may offer slightly higher effective returns due to quarterly compounding.

2. Tax Benefits & Treatment of Interest

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  • NSC: Interest is taxable but reinvested for tax benefits (except the final year).
  • Tax-Saving FD: Interest is fully taxable. Winner: NSC provides better tax efficiency as the reinvested interest reduces taxable income.

3. Safety & Risk Factor

  • NSC: Fully government-backed (low risk).
  • Tax-Saving FD: Insured up to ₹5 lakh per depositor per bank by DICGC. Winner: Both are safe, but NSC has no limit on government security.

4. Liquidity & Premature Withdrawal

  • NSC: Cannot be withdrawn before 5 years, except in special cases.
  • Tax-Saving FD: Cannot be withdrawn before 5 years. Winner: Both have the same lock-in period.

5. Suitability Based on Financial Goals

  • If you want guaranteed government security with tax-efficient interest, go for NSC.
  • If you prefer quarterly compounding and a slightly higher bank rate, opt for Tax-Saving FD.

see also: LIC Fixed Deposit Scheme Start with ₹10,000.

NSC vs Bank FD FAQs

1. Can I invest in both NSC and Tax-Saving FD?

Yes, you can invest in both to diversify your tax-saving portfolio.

2. Which option is better for senior citizens?

Senior citizens can benefit from higher FD interest rates (usually 0.5% extra), making tax-saving FDs a better choice.

3. Is NSC interest credited monthly or annually?

NSC interest is compounded annually and paid at maturity.

4. Do NSC and FDs offer loan benefits?

Yes, both NSC and tax-saving FDs can be used as collateral for loans.

5. How do I buy NSC or open a tax-saving FD?

  • NSC: Available at post offices and selected banks.
  • Tax-Saving FD: Available in all banks (online & offline).

यह भी देखें Mutual Fund SIP: मात्र 100 रूपये जमा करने पर मिलेंगे 20 लाख सिर्फ इतने साल बाद

Mutual Fund SIP: मात्र 100 रूपये जमा करने पर मिलेंगे 20 लाख सिर्फ इतने साल बाद

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