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
| Feature | National Savings Certificate (NSC) | Bank Fixed Deposit (FD) |
|---|---|---|
| Interest Rate | 7.7% (as of Q1 2025) | 6.5% – 8% (varies by bank) |
| Compounding | Annually | Quarterly (in most banks) |
| Tax Benefit | Deduction under Section 80C | Deduction under Section 80C |
| Tax on Interest | Reinvested and deductible (except final year) | Fully taxable |
| Lock-in Period | 5 years | 5 years |
| Liquidity | No premature withdrawal (except special cases) | No premature withdrawal |
| Risk Factor | Government-backed, low risk | Insured up to ₹5 lakh per depositor per bank (DICGC) |
| Minimum Investment | ₹100 | Varies by bank (₹1000 or more) |
| Where to Buy | Post offices, selected banks | Banks (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
- 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).
