NSC Vs 5-year Post Office Time Deposit: Return, tax benefits, liquidity compared

There are several investment avenues available to save taxes, two of such options are National Savings Certificate (NSC) and 5-year Post Office Time Deposit (POTD). Although bank fixed deposits (FDs) with terms of 5 years or more also provide tax benefits u/s 80C of the Income Tax Act, but both NSC and 5-year POTD are issued by Post Office and the capital invested in the two schemes enjoys government protection and hence is fully secured.

Here is a comparison of some features of NSC and 5-year POTD:

Investment Limit

In both NSC and 5-year POTD, the minimum investment limit is Rs 100 and in multiple of Rs 100 thereof. There is no limit on maximum investment in both the schemes. Investments in both the schemes may be done individually, jointly or on behalf of minor. Multiple NSC may be purchased from a single Post Office and/or from different branches. Similarly, multiple POTD accounts may be opened in a single Post Office and/or in different branches.

Return

The rate of interests on NSC and 5-year POTD are decided by the government on quarterly basis and at present the rate of interest on NSC is 7.9 per cent compounded annually but payable at maturity, while the rate of interest paid on 5-year POTD is 7.7 per cent payable annually but calculated quarterly.

So, at the present rates, Rs 1 lakh invested in NSC will become about Rs 1,46,254 in 5 years, while the same amount invested in 5-year POTD will fetch interest of about Rs 7,925 every year for 5 years.

Tax Benefits

Although there are no limits on the amount of maximum investments, but maximum deduction up to Rs 1.5 lakh will be available from the taxable income in a financial year u/s 80C of the Income Tax Act.

While both the schemes are eligible for 80C deduction, interest on both the schemes are taxable.

The interest payout under 5-year POTD is added to total income income to calculate tax liability. Unless 15G/15H certificate is not given, 10 per cent tax is deducted at source (TDS) before paying interest under 5-year POTD. Senior citizen investors enjoy tax exemption up to Rs 50,000 in a financial year on interest earned from under this scheme.

On the other hand, the interest on NSC is taxable on accrual basis, but the interest is also eligible for deduction u/s 80C. So, the accrual interest is first added under the head Income from Other Sources, but also added under 80C for deduction purpose. So, an investor may enjoy tax benefit on interest on NSC as well till the current 80C limit of Rs 1.5 lakh is not exhausted.

Liquidity

The money invested in NSC and accumulated interest can’t be withdrawn before maturity, however, an investor may get loan against NSC from any bank at a interest lower than the prevailing rate of interest on personal loan provided by the specific bank.

The principal invested in 5-year POTD may be withdrawn only after 6 months after the date of investment. If withdrawal is made after 6 months but before 1 year from the date of investment, simple interest is payable as per the prevailing interest on Post Office Savings Account, which is currently 4 per cent. If premature withdrawal is made after 1 year from the date of investment, 1 per cent less interest i.e. currently 6.7 per cent would be payable.

Source: Financial Express