FD vs PPF vs NSC: Which One Should You Invest In to Save Tax?

The financial year 2019 is drawing to a close and you might still be busy in last-minute tax planning to ease your tax burden. When it comes to tax saving, Section 80C is the buzzword allowing you to claim cumulative tax deductions of up to Rs. 1.5 lakh. However, there are multiple investment options available under section 80C and picking the right combination based on your risk-reward expectations can be a real challenge. The article helps you to compare FD vs PPF vs NSC and decide where you should invest in. 

Top Investment Options in Section 80C

Investment options available under section 80C can be broadly classified into two categories based on risk and return. One of the key categories includes investment in market-linked products such as Equity Linked Saving Scheme (ELSS), Unit Linked Insurance Plans (ULIPs) and National Pension System (NPS) which provide comparatively higher returns but at moderate risk.

The other major class of schemes are fixed return instruments such as bank/post office 5-year tax saver FDs, PPF, EPF and NSC. These schemes provide moderate returns but carry negligible risk as the returns are government guaranteed. Since the returns on these products are secure and not get affected by market movements, these fixed return tax saving investments are often the top choice for last-minute tax planning and individuals with low-risk appetite.  

Also Read: Deductions Under Section 80C

Product	Returns	Risk
ELSS, NPS, ULIPs	Potentially High (Market Linked)	Moderately High
5 Year Tax  Saver FD, NSC, PPF, EPF, VPF	Guaranteed (Fixed Rate of return)	Minimal

This article presents a comparative analysis between FD vs PPF vs NSC. We shall discuss key features of some of top tax saving options available u/s 80C for risk-averse individuals such as 5 Year Tax Saver Fixed Deposit (FD), Public Provident Fund (PPF) and National Saving Certificates (NSC) for a better tax planning. 

Tax Saver Fixed Deposits

Fixed deposit has remained a traditional hallmark of savings in India primarily because of its low-risk nature. Investments made in a tax saver FD are eligible for claiming tax deduction u/s 80C upto the maximum Rs. 1.5 lakh. The following are key features of tax saver FDs in India:  

• Individuals, HUFs as well NRIs can invest in tax saver FDs.
• Principal amount invested in the fiscal is fully tax deductible u/s 80C rules and limits
• The interest rates on tax saver FD ranges from 5.75 to 8.75%.
• It comes with a lock-in period of 5 years.
• No premature withdrawal is allowed.
• No loan or overdraft facility available against a tax saver FD.
• Interest earned is taxable as per the tax bracket of the investor.

Also Read: Interest Rates on Tax Saving FDs

Public Provident Fund (PPF)

Public Provident Fund or PPF is another popular tax saving investment option available u/s 80C that earns guaranteed returns along with tax benefits. You can invest upto Rs. 1.5 lakh annually in PPF with a lock-in period of 15 years which makes PPF a long-term investment option. The rate of return on PPF is set by the government quarterly and returns have a sovereign guarantee hence feature close to nil risk.   

• Any resident Indian can invest in PPF.
• Currently, PPF investments enjoy 7.1% annual returns.
• Lock-in period of 15 years which is extendable indefinitely in blocks of 5 years at a time.
• One can take a loan upto 25% of the PPF deposits subject to key terms and conditions. However, one can apply for a loan against PPF only from start of 3rd financial year till the end of 6th fiscal calculated from the date of account opening.
• Partial withdrawal of up to 50% of PPF deposits is allowed (subject to applicable terms and conditions). But this is allowed only after completion of the 6th financial year.
• PPF is an EEE (exempt exempt exempt) instrument. Thus the principal invested, the interest earned and the maturity amount are all tax exempt.  

Also Read: All You Need to Know About PPF

National Saving Certificate (NSC)

NSC is essentially a post office saving product which is again a secure government-backed investment and also eligible for claiming tax benefits u/s 80C upto the Rs. 1.5 lakh per year limit.

• Only Individuals can invest, HUFs or Trusts are not eligible to invest in NSC.
• Currently, NSC provides interest rate at 7.7% per annum. Further, there is no TDS deduction on interest accrued.
• The 5 years NSC can be bought at any post office (the 10 years NSC available earlier has been discontinued).
• Premature withdrawal is not allowed. However, you can avail overdraft or loan facility against NSC from various banks in India.
• Interest earned in the financial year can also be claimed for the tax deduction as it is considered to be reinvested. However, the interest accrued in the final year of NSC maturity is not eligible for claiming tax benefits as it is paid out to the individual on maturity and not reinvested.

Also Read: National Saving Certificate (NSC): Interest Rate, Eligibility & Investment  

FD vs PPF vs NSC: A Comparative Analysis

Product	Return	Risk	Lock-In	Loan/ Overdraft	Tax on Returns
Tax Saver FD	5.75%-8.75%	Very Low	5 Years	No	Yes
PPF	7.1%	Very Low	15 Years	Yes	No
NSC	7.7%	Very Low	5 Years	Yes	No (Only interest accrued on maturity is taxable)

Following observations can be made from the data mentioned above:

• All the above-fixed return products are eligible for claiming tax deduction under section 80C upto Rs. 1.5 lakhs annually in a financial year.
• All three options are absolutely safe, secure and low-risk product.
• Returns on tax saver FDs are comparatively lower than returns on PPF and NSC.
• The maturity period on tax saver FD and NSC are 5 years while that of PPF is 15 years. A lock-in period of 15 years on PPF deposits makes it a long-term investment product.
• The overdraft or loan facility on PPF and NSC address liquidity concerns in a financial emergency which a tax saver FD fails to provide.  
• Moreover, interest accrued on a tax saver FD is considered as a part of taxable income while in case of PPF and NSC, returns are tax exempt.

Also Read: Should You Invest in PPF?

Conclusion:

While all the above products are secure and low-risk in nature, returns on tax saver FD are comparatively lower than PPF or NSC. Further, the interest accrued on tax saver FDs is considered as taxable income. Absence of loan or overdraft facility and premature withdrawal on tax saver FD makes it comparatively less liquid and flexible.

Therefore, considering risk, returns, liquidity, maturity period and tax treatment as factors, PPF or NSC seem a better choice than a tax saver FD. On the other hand, a simple comparison between PPF and NSC reveals that both of the products score similar to most of the factors. The only difference between PPF and NSC is in terms of time horizon, while PPF is definitely meant for investors with long term perspective, NSC is more suited for individuals with a shorter investment horizon.