As interest rates on small savings schemes have become competitive after the government raised the rates recently, risk-averse investors willing to park money in fixed income for a period of five years should look at National Savings Certificate (NSC) and five-year post office time deposits that offer higher returns than bank deposits of similar tenure.
The interest rate for the NSC has been fixed at 7.7% for April to June by the government, a rise of 70 basis points from the previous quarter, the highest raise amongst all small savings schemes. In contrast, the country’s largest lender, State Bank of India, is offering 6.5% for fixed deposits over five years. Even the interest rate of 5-year post office time deposits is 7.5%.
The interest rate of the NSC was raised from 6.8% in Q1FY21 to 7% in Q4FY23, after a gap of 11 quarters and now revised to 7.7% for Q1FY24. Experts say individuals should lock-in investments in the NSC at higher rates and even gain from the tax advantages.
Read More:-Investor Alert! US stocks and bond markets showing a big disconnect currently
National Savings Certificates
Investing in the NSC is a popular savings instrument in India backed by the Central government. The minimum amount of investment is Rs 1,000 and multiple of Rs 100. There is no maximum limit of investment. The certificate will mature after five years from the date of the deposit. The certificates can be pledged to a bank or a housing finance company.
Under Section 80C of the Income Tax Act, the amount invested in the NSC is eligible for a deduction from the taxable income up to a limit of Rs 1.5 lakh in a financial year. While the interest accrued on the NSC is taxable, an investor pays tax either on accrual basis or the on receipt basis in the year of maturity. If the interest is offered for tax on accrual basis, then the accrued interest is deemed to have been reinvested in the NSC and the investor can claim deduction for the accrued interest for the year under Section 80 C for four years except the last year when the certificate matures.
Read More:-Investor Alert! What Is ‘Dabba’ Trading And Why Should You Stay Away From It?
Maneesh Bawa, executive director, Nangia Andersen LLP, says interest earned on a bank deposit is fully taxable as income in the year it is earned, and it is added to the income of the investor for that year. On the other hand, the interest earned on the NSC is also taxable, but it is deemed to be reinvested and is eligible for deduction under Section 80C of the Income Tax Act. “If an individual is in a higher tax bracket and the NSC offers a higher interest rate, then the NSC may be more tax-efficient than bank deposits due to the tax benefit available under Section 80C of the Income Tax Act,” he says.
Time deposits
The interest rates offered by small savings on time deposits of over three years are also higher than bank deposits. The interest rate of one-year and two-year post office time deposits is 6.8% and 6.9%, respectively, similar to what SBI is offering. However, for a three-year post office time deposit, the interest is 7%, higher than 6.5% offered by SBI. For longer tenures, the five-year post office time deposit is now offering 7.5% as compared with SBI’s 6.50% for five years and up to 10-year fixed deposits.
Also Read–EAM Jaishankar launches ‘Tulsi Ghat Restoration Project’ in Uganda
The interest earned from both post office time deposits and bank deposits are taxed at the investor’s marginal tax rate. However, investors can claim deduction under 80C of up to Rs1.5 lakh for investing in the five-year deposits.
Senior Citizen Savings Scheme
An individual above 60 can invest in a five-year Senior Citizen Savings Scheme which is offering interest of 8.2%. The minimum and maximum amount of investment is Rs 1,000 and Rs 30 lakh respectively. The interest is paid every quarter and the amount is taxed at the marginal rate of the individual. The lock-in period is for five years and can be extended only once for three years. Joint account can be opened with a spouse only and the first depositor in the joint account is the investor.
