NSC vs RBI Savings Bonds: Know the Difference Between NSC and RBI Savings Bond

NSC & RBI Savings Bonds are the two safest options for cautious small investors as they are government schemes.

Published: Feb 11, 2020
RBI Bonds Image: Shutterstock

In the past couple of years, the confidence of small investors has been shaken by events like the debt default by IL&FS, and the irregularities at Punjab & Maharashtra Cooperative (PMC) Bank because of which thousands of depositors lost access to their funds. So, people are constantly looking at safe avenues to park their hard-earned cash.

Two options should bring some relief to even the most cautious of investors. These are National Savings Certificates (NSC) and Reserve Bank of India Savings Bonds. Both are backed by the government – NSC by the Indian Postal Service and RBI Savings Bank of course by the RBI – and hence risk-free. However, there are some differences between the two. Let's look at them.

National Savings CertificatesRBI Savings Bonds
Issued byIndian Postal ServiceReserve Bank of India
Maturity periodFive yearsSeven years
Interest rate7.9 per cent7.75 per cent
Who can investResident IndiansResident Indians
AmountMinimum of Rs. 100 with no maximum limitMinimum of Rs. 1,000 and in multiples thereof. No maximum limit
Tax benefit on investmentInvestments up to Rs. 1.5 lakh deductible from taxable income under Section 80CNo tax benefit on investment
Tax treatment of interestInterest is added to income and taxed according to income slab Interest is added to income and taxed according to your slab
Calculation of interestHalf-yearly compounded basisHalf-yearly compounded basis
Interest paymentsCumulative, on maturityCumulative or non-cumulative (payable half-yearly)
Loan facilityCan be used as collateralNot eligible for collateral
Where to buyAt your local post officeAt nationalised banks and three private sector banks

As we can see from the table above, the two instruments are similar in interest rates, risk profile and tenure. The major difference is that investments in NSC are eligible for deductions from taxable income under Section 80C, while RBI Savings Bonds do not enjoy any such benefit.

Cost-benefit analysis

So tax benefit on NSC aside, are these two good options for cautious investors? The plus points in their favour are low risk and high interest rates. NSC and RBI Savings Bonds offer interest rates of 7.9 per cent and 7.75 percent respectively, while most reputed banks today offer between 6 and 7 per cent on fixed deposits.

One disadvantage could be the relatively long lock-in periods of five years for NSC and seven for RBI Savings Bonds. While you can use NSCs to avail of a loan, there is no such facility for RBI Savings Bonds. Another disadvantage is that if interest rates rise during the tenure of these two instruments, you will not enjoy the benefit.

Moreover, when these instruments mature, interest income from them will be added to your taxable income and taxed according to the slab in which you're in. There's a chance the interest earnings could push you into a higher income slab, in which you have to pay a higher rate of income tax. For example, if you invest Rs.5 lakh in RBI Savings Bonds and opt for the cumulative option, at the end of seven years, your interest earnings would be Rs. 3.5 lakh. That could well put you in a higher tax slab. So it might be a better idea to take the non-cumulative option and opt for half-yearly interest payments.

The disadvantages are few and benefits considerable, so may consider adding both NSC and RBI Savings Bonds to your portfolio.

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Original Source: https://www.moneycontrol.com/news/business/nsc-vs-rbi-savings-bonds-know-the-difference-between-nsc-and-rbi-savings-bond-4931131.html