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 Certificates||RBI Savings Bonds|
|Issued by||Indian Postal Service||Reserve Bank of India|
|Maturity period||Five years||Seven years|
|Interest rate||7.9 per cent||7.75 per cent|
|Who can invest||Resident Indians||Resident Indians|
|Amount||Minimum of Rs. 100 with no maximum limit||Minimum of Rs. 1,000 and in multiples thereof. No maximum limit|
|Tax benefit on investment||Investments up to Rs. 1.5 lakh deductible from taxable income under Section 80C||No tax benefit on investment|
|Tax treatment of interest||Interest is added to income and taxed according to income slab ||Interest is added to income and taxed according to your slab|
|Calculation of interest||Half-yearly compounded basis||Half-yearly compounded basis|
|Interest payments||Cumulative, on maturity||Cumulative or non-cumulative (payable half-yearly)|
|Loan facility||Can be used as collateral||Not eligible for collateral|
|Where to buy||At your local post office||At 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.Subscribe to Moneycontrol Pro's Annual plan for Rs 399/- for the first year. Use coupon PRO2020 (Available on Web & Android only).
Original Source: https://www.moneycontrol.com/news/business/nsc-vs-rbi-savings-bonds-know-the-difference-between-nsc-and-rbi-savings-bond-4931131.html