Is NSC With 7.7 Per Cent Interest Better Than Bank FDs?

The government kept the interest rates intact for the small savings scheme for the first quarter of the financial year 2026-27. The National Saving Certificate (NSC) interest rate also remained unchanged at 7.7 per cent. As small savings schemes carry a sovereign guarantee, they present an attractive option for those who don’t want volatility and uncertainty in their portfolio, such as senior citizens.

Although seniors also prefer bank FDs for their sheer simplicity and the comfort and services banks provide. However, when compared, NSC remains a competitive option.

NSC Vs Bank FDs

NSC has a five-year lock-in. Once the amount is invested, it starts earning interest, which is annually credited and added to the NSC balance. After five years, the total amount, including the principal and interest, is transferred to the savings account.

Bank FDs also offer the same features, except that they can be opened for several different tenures, starting from seven days to 10 years. Interest is usually credited on a quarterly basis, but the account holder has the option to reinvest the interest or get it transferred to the savings account. In short, the frequency of interest accrual is higher in FDs compared to NSCs.

Minimum And Maximum Amount

In both instruments, the minimum amount is Rs 1,000 with no limit on the maximum amount. While FDs (other than tax saver FDs) can be renewed from the date of maturity, NSC has to be closed at maturity. To avail of NSC benefits, one needs to buy it again afresh.

Premature Withdrawal

Banks offer a premature withdrawal facility after imposing a penalty and adjusting the rate of interest applicable for the period for which an FD has been maintained. For example, in HDFC Bank, the interest will be 1 per cent less (penalty as applicable) of the rate on the date of deposit booked to the period for which the deposit remained with the bank, and not at the contracted rate.

Compared to this, NSC offers premature withdrawal only in case of the account holder’s death, forfeiture by a pledgee/gazetted officer, or when ordered by a court. Here, the penalty is not a fixed 1 per cent, but depends on the holding period. If NSC is closed within a year, no interest is paid. If it’s closed after one year but before three years, post office savings interest is paid, and if closed after three years, but before maturity, the interest is paid as per rules under Para 7(4).

Taxation

Investment under the scheme is tax-exempt under section 80C of the Income-tax Act 1961 (Section 123 of the Income-tax Act 2025). The tax saver FDs also offer the same tax benefits, and the fund is locked in for five years. However, for other FDs, there is no lock-in. The interest in all these cases is taxable as per one’s slab rates.

If tax saving is the purpose, both these instruments are more or less the same, except for the interest rates. For example, at present, Bank of Baroda tax-saving FD offers 6.30 per cent to the general public and 6.90 per cent to senior citizens. IDBI Bank’s Suvidha Tax Saving FD offers 6.25 per cent to the general public and 6.75 per cent to senior citizens.

Considering the average 6-7 per cent rates in tax-saving FDs with banks, NSC’s 7.7 per cent interest at present is certainly attractive.

However, if tax savings are not the purpose, one must remember that NSC, just like any other long-term fixed-income instrument, is prone to interest rate risk. One cannot make a premature withdrawal from NSC even if interest rates rise. And thus, when inflation is higher, the real return becomes low.