Recurring deposit v/s national savings certificate: Differences and facts
What's the story
In India, recurring deposits (RDs) and national savings certificates (NSCs) are two of the most popular investment options for those looking for safe and guaranteed returns. While both serve the purpose of wealth creation, they have their own features, benefits, and drawbacks. Knowing these can help you make informed investment decisions depending on your financial goals and risk appetite.
#1
Understanding recurring deposits
Recurring deposits are savings schemes offered by banks/post offices, where you deposit a fixed amount regularly for a predetermined period. They offer fixed interest rates, usually higher than regular savings accounts but lower than other investment avenues. RDs encourage disciplined saving habits as they require regular contributions. The maturity amount includes both principal and interest earned over the tenure.
#2
Features of National Savings Certificates
National savings certificates are government-backed fixed-income securities with a fixed tenure of five years. They can be purchased from post offices in denominations as low as ₹100. NSCs offer higher interest rates than many bank deposits and compound the interest every six months. However, unlike RDs, NSCs do not allow premature withdrawals except under certain conditions.
#3
Comparing interest rates
When it comes to interest rates, NSCs usually offer higher returns than RDs. The rates are subject to change based on government policies but generally hover around 6.8% per annum for NSCs compared to 5%-7% for RDs, depending on the bank or post office schemes. However, while RD interest is calculated monthly, NSC interest compounds every six months, making it an attractive option for long-term investors.
#4
Liquidity considerations
Liquidity is an important factor when choosing between RDs and NSCs. RDs allow premature withdrawal after a certain period but may incur penalties or reduced interest rates if contributions are missed or withdrawn early. On the other hand, NSCs have limited liquidity as they mature only after five years unless sold back to the issuing authority under specific conditions.
Tip 5
Tax implications on investments
Both recurring deposits and national savings certificates come with tax implications that investors should keep in mind while making their choice. Interest earned on RDs above ₹10,000 per financial year is taxable under income tax laws, while no such limit applies for NSC earnings, which also qualify for Section 80C deductions up to ₹1.5 lakh annually, subject to other qualifying criteria being met.