Post Office Time Deposit Vs Bank FD Vs NSC: A Comparison For Tax Savers

Some best and secure investment options that come with tax advantages under section 80C of the Income Tax Act and which have a guaranteed return are the 5-year tax-saving bank fixed deposits, post office time deposits and National Savings Certificates (NSC). For a number of investors, particularly senior citizens, bank fixed deposits stay the first option when it comes to park capital in a secure place. That being said, the plunging yield has an influence on the regular expenses of those investors who rely on FD, as the assured and fixed returns with interest rates are low. However, the common facts in the 5-year FD bank, Post office 5-year time deposit, NSC are fixed interest rate, tax benefits under section 80C and 5-years of maturity period. But where should you invest? Let's find out.

5 Year Tax Saving FD

The 5-year tax-saving FD scheme of banks will serve you if you are a taxpayer and want to seek tax advantage of your investment in bank FD. In compliance with section 80C, the investment made in the bank FD by a tax saver qualifies for tax gain. Under a tax saving FD as the interest is paid together with the principal after the completion of the maturity period one can even opt for either monthly or quarterly or cumulative payout options. No partial or early withdrawal is allowed under the 5-year tax-saving FD scheme and there is no provision for applying for a loan against tax saving FD. Whereas the presumed assurance exists for Bank FD, under the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, the exact assurance is only up to Rs 5 lakh. The insurance policy is on the principal and interest gained and is applicable in every branch of a bank on deposits.

5 Best Tax Saving FDs

 

Banks	ROI per annum in % for general public	ROI per annum in % for senior citizens
DCB Bank	6.75	7.25
Equitas Small Finance Bank	6.75	7.25
AU Small Finance Bank	6.5	7
IndusInd Bank	6.5	7
RBL Bank	6.4	6.9

Post Office Time Deposit

In a post office, the post office time deposit (TD) is much like a bank fixed deposit, however one can only deposit for a period of 1 year, 2 years, 3 years, and 5 years. The contribution made for a five-year term is liable for the tax gain under Section 80C. The interest rate on time deposit is kept at 5.5 per cent for 1 to 3 years of maturity period for the present quarter of January to March 2021, while the interest rate is higher on 5 years of deposit, i.e. 6.7 per cent. The interest gained is completely taxable and, as in the example of bank FD, which means that interest received from post office time deposit fall under the head 'Income from other sources'. There is no chance of any default as the post office small savings schemes are backed by the government of India. There are no monthly, semi-annual or quarterly interest payout alternatives, which means that investors who want a regular income, post office time deposit is not the best.

National Savings Certificates (NSC)

Unlike bank FD and PO Time Deposit, NSC doesn't provide regular or annual interest payout as the tenure of this scheme is 5 years. It is possible to have the amount invested in NSC only upon maturity. One can deposit in 5 Years National Savings Certificate (VIII Issue) with a minimum amount of Rs. 1000/- and in multiples of Rs. 100/- with no upper limit. The subscriber can receive a tax rebate under Section 80C for investments of up to Rs.1.5 lakh in the National Savings Certificate. In addition, the interest received on the certificates is also placed back to the initial investment and also qualifies for a tax deduction. For example, you are eligible for a tax benefit on that initial investment amount in the first year if you buy certificates worth Rs.1,000. But you can seek a tax benefit on that year's NSC investment(s) in the second year, and also the interest gained in the first year. Which is why the interest is compounded annually and applicable to the initial deposit. Currently, the NSC interest rate is 6.8% per annum but paid upon maturity.

Our take

Even if the NSC interest rate is higher relative to 5-year tax-saving bank FD and PO 5-year time deposit, you can choose between bank FD and PO Time Deposit if you want to get a regular income after retirement. Although Bank FD has the option of paying monthly, quarterly or half-yearly interest payments, whereas PO Time Deposit only has an annual payout option. So bank FDs can be a good bet here for senior citizens as they relatively get additional interest rate compared to the regular one.