Most investors are looking for an investment option that can give them decent returns with lower risk and traditionally, fixed deposits and recurring deposits have served the purpose for a lot of investors. This is one reason why FDs and RDs still find a lot of investors even when there are investment options with a higher potential for return.
A National Savings Certificate offered by the central government through post offices is becoming a popular option in this segment as well. But which one among them is better and are they still considered valid in 2022? Let’s examine.
What are fixed deposits?
Fixed deposits are investment schemes offered by the banks and these tend to give more interest rate than traditional savings accounts. Here, the amount you invest will be locked till the end of the maturity date and breaking the fixed deposit comes with charges. On the plus side, you will earn interest at a compounded rate till the end of maturity and since the deposit is not market-linked, there is almost zero risk attached with it. Also, the earnings are fixed, and this makes financial calculation and planning much easier.
But investing in fixed deposits needs a lump sum and as an alternative for this, you could choose a recurring deposit. Here, similar to an SIP, you can invest a small amount every month to slowly yet steadily grow your money. Recurring deposit accounts give you compound interest and because of this, there is a chance for growth even if you start small.
What is a National Saving Certificate?
A National Saving Certificate is a government savings scheme that you can avail through post offices. You can open one NSC account by going to your nearest post office. You can start an investment scheme with an initial deposit of as low as Rs. 100 and there is no maximum limit for the money you can invest in an NSC.
The National Saving Certificate scheme has a lock-in period of five years, post which the certificate cannot be renewed and if you want to continue investing in the same, you will have to buy a new certificate. Currently, an NSC gives an interest rate of 6.8% per annum, which is in line with most FDs and RDs.
Another advantage that NSCs have is their tax saving component. An NSC comes under Section 80C of the Income Tax Act of India, 1961, and you can claim a rebate of up to Rs. 1.5 lakh in tax savings. The one caveat NSCs have is that only citizens living in India can currently open an account. NRIs can choose other options such as FDs or RDs here.
FD vs NSC – The choice
As with most investments, the final choice is dependent on your investment horizon. As both schemes are not market-linked, they come in a similar low-risk category. The main difference lies in liquidity. Although both have a lock-in period, an FD is easier to break in case of an emergency. The FD opening process is mostly online compared to opening an NSC account. An NSC scores in the tax savings department as it comes under section 80C of the Income Tax Act, compared to only type of FD that falls under this section.
Beginning to save, whether it’s NSC or FD, is the best thing you can gift to your future self. Talk to your financial advisor and invest soon.
