This is for people who are looking for safe, assured and fixed returns on their investments meant for saving tax have three popular options to look at-
a) The 5-year tax-saving bank fixed deposits,
b) Post office time deposits and
c) National Savings Certificates (NSC)
Above three investment alternatives that come with tax benefits under section 80C of the Income Tax Act and also provide a fixed return. Bank fixed deposit comes at the top and safest mode for investing money for the long term by most of the investors, especially senior citizens.
Let us look at each one of them and compare which is a better option to invest Rs 1.5 lakh under section 80 for saving tax
Here are the similarities in the 5-year bank FD, PO 5-year time deposit, NSC
• They carry a fixed rate of interest
• They qualify for availing deduction under section 80C tax benefit
• They are for a minimum duration of five years.
Here are the difference’s in the above three options:-
A) 5-year tax-saving FD
i) 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. Bank FD Tax saver will be eligible for availing deduction under section 80C for tax benefit and will help you to save tax.
ii) 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. Even if the Bank deposit or the FD is in the name of joint owners still the benefit can only be made available to the First holder only.
iii) 5-year tax-saving FD scheme does not allow any partial or premature withdrawal and there is no facility to take a loan in them. Recently, amongst the other banks, the interest rate on 5-year tax-saving FD scheme of SBI bank is giving 6.25%, 6.4% for ICICI Bank and 7% in Jana Small finance bank. Jana Small Finance Bank is giving the highest rate of return as compared to the other banks.
iv) Compared to leading commercial banks, the interest rate offered by most Small Finance Banks will be higher.
v) The interest earned is fully taxable in the hands of the investor in the year of receipt.
B) Post office time deposits-
i) 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 years, 3 year and 5 years.
ii) 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 from this is fully taxable under the Income Tax Act and to be added to the individual’s income under the head ‘Income from other sources’ as in the case of bank FD.
iii) There is complete safety as the entire amount in post office time deposit is backed by a government guarantee.
iv) Interest rate is generally higher than bank FD in most cases. However, there are no monthly, half-yearly or quarterly interest payout options; hence PO time deposits may not suit those who need regular income.
C) National Savings Certificates (NSC)
i) 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 taken only at the time of maturity.
ii) 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.
iii) Currently, NSC interest rate is 7.9 per cent per annum compounded annually but paid on maturity.
As per the above analysis, the interest rate of return in NSC is higher, as compared to 5-year tax-saving bank FD and PO 5-year time deposit, if your requirement is to get a regular income, you should choose between bank FD and PO Time Deposit.
But in that case, only bank FD comes with option to get monthly, quarterly or half-yearly interest payment while PO Time Deposit has only annual payments. Also, the Senior citizens are given extra interest rate, as they need to compare the bank FD rates after factoring in the additional rate of interest.