NSC Schemes Vs. Fixed Deposits: Which One Is Better?

Investments are a smart solution for long-term wealth generation. Choosing a secure and easy-to-avail option can help you create a more balanced portfolio. Two options you can consider are the National Savings Certificate and fixed deposits. When you compare NSC and FDs, you may find that they both have several advantages and limitations. This is why choosing between them can be a tough decision.

Only after evaluating your investment objectives and their characteristics can you select the most appropriate option for yourself. Continue reading to discover more about the variations between the National Savings Certificate and fixed deposits. 

Overview of NSC Schemes

This is a fixed-income scheme backed by the government. It is designed for small to mid-income investors looking for long-term savings and secure returns. It comes with a 5-year lock-in period and a pre-determined interest rate. You can start investment with a nominal amount of ₹100. 

The following is the eligibility for NSC schemes, which you must know for comparison with FDs:

• Age: Anyone above 10 years of age can apply for this scheme
• Nationality: Any Indian citizen can apply  

The following entities cannot apply for NSC:

• Hindu Undivided Families (HUFs)
• Trusts
• Private and Public Limited Companies (PLCs)
• Non-Resident Indians (NRIs)

Eligibility for FDs

As you may know, it is a secure savings option that requires a lump sum investment. You can choose a preferred tenure according to which issuer gives you an interest rate. Most issuers charge a penalty on withdrawal before completion of tenure. Here’s a list of eligible entities who can book an FD:

• Residents
• Sole proprietorship firms, partnership firms and limited companies
• HUFs (Hindu Undivided Families)
• Trust accounts

NSC VS. Fixed Deposit

Here are the differences between NSC and FD schemes:

Topics	NSC	FD
Interest rate	7.7% at present	Varies between 2.50% and 9%
Compounding frequency	Yearly	Quarterly in general
Minimum Investment Amount	₹1,000	₹1,000 to ₹10,000, depending on the issuer
Maximum Investment Amount	No upper limit for investment	Depends on the bank or issuer, though most don’t.
Lock-in Period	Minimum 5 years	7 days to 10 years
Risk appetite	Low risk	Low to moderate risk
Tax Benefits	Qualifies for tax deduction under 80C	5-year tax-saver FDs offer 80C deduction
Premature Penalty	It has a penalty for premature withdrawal	Most banks impose penalties on premature withdrawals

A Comparative Study of NSC and FD with an Example

Assume you invested ₹1 lakh in an NSC and fixed deposit for 5 years. The following example shows your returns after 5 years. 

For National Savings Certificate:

• Capital: ₹1 lakh
• Tenure: 5 years
• Interest Rate: 7%
• Compounding frequency: Annually
• On maturity, the interest amount will be ₹40,255
• After claiming tax benefits, the maturity amount will be ₹1,40,255 

For fixed deposit, assume you have:

• Capital: ₹1 lakh
• Tenure: 5 years
• Interest Rate: 7% 
• Compounding frequency:  Quarterly
• The interest on maturity will be ₹41,478
• Maturity amount will be ₹1,41,478 (₹1 lakh + ₹41,478)

Note: The example above does not take the tax liability into account. Ensure you calculate your potential tax to calculate your actual returns. 

NSC or FD: Which is Better?

Both have their benefits and drawbacks, and here’s an overview to help you choose more efficiently.

• NSC: If you are looking for a long-term investment with a slightly higher return, then choose NSC schemes. This is a government-backed scheme, ideal for a low risk appetite. 
• FD: With a fixed deposit, you can potentially earn more with higher interest rates and have more flexibility in choosing the investment tenure. Alongside long-term investment options, you can also invest for short-term goals.

Based on your requirements, you can invest in NSC or a fixed deposit or both. 

Also Read: Term Deposit vs Fixed Deposit

FAQs on NSC vs Fixed Deposit

How is the tax treatment different for NSC and Fixed Deposits?

The interest in NSC schemes is reinvested through the lock-in period, so you only need to pay tax on the final year’s interest. Additionally, you can claim deductions under section 80C of the Income Tax Act. On the other hand, FD interests are considered earnings and are taxed as per your income tax slab. FDs also offer the same 80C benefit when you go for the five-year tax-saver option.

Which is better for long-term investment: NSC or Fixed Deposit?

The answer to this question completely depends on your investment objectives and post-tax returns. Usually, an FD is better if you want to invest for fewer than 5 years. If not, NSC may be a better option. Check your returns before you decide. 

Can I withdraw funds early from NSC and Fixed Deposits?

Premature withdrawal is simple when it comes to FDs, though an interest penalty applies in most cases. However, doing so is not easy in NSC, and it is only allowed in exceptional cases.