King January 13, 2020

Where to invest, Bank FD vs PO Time Deposit Vs NSC, bank fixed deposits, Rs 1.5 lakh saving tax, Section 80C, Post office time deposits,

When it comes to investing money in a safe place, bank fixed deposits remains the first choice for several investors especially senior citizens.

Those who are looking for safe, assured and fixed returns on their investments meant for saving tax have three popular options to look at. The 5-year tax-saving bank fixed deposits, post office time deposits and National Savings Certificates (NSC) are three such investment alternatives that come with tax benefits under section 80C of the Income Tax Act and also provide a fixed return. When it comes to investing money in a safe place, bank fixed deposits remain the first choice for several investors, especially senior citizens. However, with interest rates coming down, the falling yield is having an impact on the monthly household budget of those investors who bank upon FD for safe, assured and fixed returns. Let us look at each one of them and see which is a better option to invest Rs 1.5 lakh under section 80C for saving tax

What is common in 5-year bank FD, PO 5-year time deposit, NSC

There are a few things common in PO Time Deposit, NSC and 5-year bank FD:

  • All of them carry a fixed rate of interest
  • All of them qualifies for section 80C tax benefit
  • All of them are for a duration of five years.

5-year tax-saving FD

If you are a taxpayer and want to take tax benefit on your investment in bank FD, the 5-year tax-saving FD scheme of banks could suit you. The investment made in the bank FD tax saver qualifies for tax benefit under section 80C and will, therefore, help you save tax.

One may opt for either monthly or quarterly interest payouts or may even opt for the cumulative option in which case the interest is paid together with the principal at the end of the maturity. The deposit may be made in joint name, the tax benefit, however, can be availed only by the first holder in whose name the investment is made.

5-year tax-saving FD scheme do not allow any partial or premature withdrawal and there is no facility to take a loan in them.

Currently, amongst the various banks, the interest rate on 5-year tax-saving FD scheme of SBI bank is 6.25 per cent, 6.4 per cent for ICICI Bank and 7 per cent in Jana Small finance bank. Compared to leading commercial banks, the interest rate offered by most Small Finance Banks will be higher.

The interest earned is fully taxable in the hands of the investor in the year of receipt. For someone paying 31.2 per cent tax ( highest tax slab), the post-tax return on a 7 per cent FD comes to about 4.82 per cent.

Even though the implicit guarantee exists on bank FD, the explicit guarantee is only up to Rs 1 lakh under the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act. The insurance cover is on the principal and interest earned and is available on deposits in each branch of a bank.

Post office time deposits

The post office time deposit (TD) in a post office is almost similar to a bank fixed deposit but one can deposit only for 1 year, 2 year, 3 year and 5 years. The deposit made for 5-year duration qualifies for the Section 80C tax benefit.

Currently, ( January 1 to March 31, 2020) the interest rate is 7.7 per cent per annum, payable annually but compounded quarterly. The interest earned is fully taxable and to be added to one’s ‘Income from other sources’ as in the case of bank FD.

There is complete safety as the entire amount in post office time deposit is backed by a government guarantee. Even the interest rate is higher than bank FD in most cases. However, there is no monthly, half-yearly or quarterly interest payout options, hence PO time deposits may not suit those who need regular income.

National Savings Certificates (NSC)

The tenure of NSC is also 5 years but unlike bank FD and PO Time Deposit, there is no option to get regular interest payout, not even annual payments. The amount invested in NSC can be had only on maturity.

The interest is taxable in NSC but the unique thing about NSC is that the interest accruing annually during the first 4 years is deemed to be re-invested and thus qualifies for tax benefit under section 80C.

Currently, NSC interest rate is 7.9 per cent per annum compounded annually but paid on maturity. Illustratively, Rs 100 grows to Rs 146.25​ after 5 years.

To Sum Up

Even though the interest rate in NSC is higher, compared to 5-year tax-saving bank FD and PO 5-year time deposit, if your requirement is to get a regular income, you will have to choose between bank FD and PO Time Deposit. Only bank FD comes with option to get monthly, quarterly or half-yearly interest payment while PO Time Deposit has only annual payments. Senior citizens are given additional interest rate, hence, they need to compare the bank FD rates after factoring in the additional rate of interest.