As curtains to the financial year are drawing to a close, investors are bombarded with a myriad of queries on determining the right choice of investment. With numerous options, a decision should be made considering the factors of risk appetite, goals, tenure, interest rates, and the investment amount. In this comprehensive approach, a comparison has been drawn on the three popular tax saving tools: Fixed Deposit (FD), Postal Office Time Deposits (PO), and National Savings Certificates.
Five-year Tax saving FD
Fixed deposits (FD) are deposits made with banks or NBFCs for a stipulated time over a fixed rate of interest. Investors preferring to obtain tax benefits through the bank FDs can invest in a five-year fixed deposit.
- The income from bank FDs does not waver on the changing winds of the economic climate.
- Investors can opt for regular payouts through monthly or quarterly interest payout schemes. If investors desire a payout at the time of maturity along with the principal, then it can be achieved through a cumulative option.
- FD Interest rates offered by financial platforms vary from 4% to 8%, with some prominent platforms such as PNB Housing offering upto 8.07%.
- Senior citizens are eligible for higher interest rates. E.g., at PNB Housing, best FD rates upto 0.25% are offered for senior citizens.
- During a financial crunch, investors can choose to liquidate their fixed deposit. However, premature withdrawal penalties will be charged depending on the bank.
Postal Office Time Deposits (PO)
The postal time deposits are similar to the bank fixed deposits. However, the investments can be made only for one year, two years, three years, and five years.
- As per the current rates (January 1 to March 31, 2020), the interest rates for PO is 7.7 per annum, which is higher than most of the bank FD interest rates.
- Although the interest is compounded quarterly, the payout is made only annually, unlike fixed deposits, which has regular payouts.
- Entirely backed by the government, the PO offers a high degree of safety of the investment amount.
National Savings Certificate
The format of this investment is similar to the bank FDs and postal office time deposits. A deposit made for five years, the NSC, however, doesn't offer flexible payout options. The invested amount is available only at maturity.
- The current interest rates of NSC is 7.9%, higher than most of the bank FDs and PO
- Backed by the government of India, it is entirely a low-risk investment
- It can be used as a collateral to avail secured loans
To sum up, Bank FDs, PO, and NSC are all tax-saving tools covered under the Income Tax Act 80C. However, the choice of investment should be made after planning out the goals of the investor. E.g.;
although NSCs offer a higher rate of interest, it does not provide regular payouts. Hence investors looking for payouts should opt for bank FDs and PO. Also, Bank FDs offer flexible payouts with the best FD rates for senior citizens.