As interest rates head southwards it is getting more difficult for an investor to choose the best-fixed income instrument in terms of both returns (i.e. coupon rate) and tax efficiency.

Earlier, the 8% Relief Bond was attractive. But this has changed once the finance minister put an investment cap of Rs 200,000 on these bonds. Recently the 7% Savings Bond was introduced in the market, which has no maximum investment limit. However, investors are not satisfied with the coupon rate offered by the savings bond (i.e. 7%) and have started comparing it with the post office scheme, mainly the National Savings Certificate (NSC). In this article we have compared these two instruments and have worked out which is the better option for the investor.

Savings Bonds Vs NSC

	Savings Bond	National Savings Certificate
Interest rate	7% p.a.	9% p.a.
Minimum Invt. (Rs)	1000	100
Maximum Invt. (Rs)	No limit	No limit
Tenure	6 years	6 years
Options	Half yearly/Cumulative	Cumulative
Tax benefits	Tax free	Sec 88 & Sec 80L
Safety	Highest	Highest

From the above table if one compares the interest rates, NSC looks more attractive with a 9% p.a. interest rate as compared to 7% p.a. offered by the Savings Bond. However, ideally, one should compare these returns on a post-tax scenario. We have taken an example of investor 'A' wherein he invests in both Savings Bond and NSC. However, since NSC offers a rebate u/s. 88 we have considered two scenarios wherein in the first case 'A' is not eligible for rebate u/s. 88 and in the second case he is eligible for the rebate. In this illustration we have assumed that 'A' is in the highest tax bracket and has taken the benefit of section 80L under other instruments.

The more tax-efficient option

A's investment in 7% Savings bond		A's investment in NSC
Investment (Rs)	70,000	Investment (Rs)	70,000
Tenure (yrs)	6	Tenure (yrs)	6
Interest (%)	7	Interest (%)	9
Maturity Value (Rs)	105,775	Maturity Value (Rs)	118,712
Tax paid interest	Nil	Interest Income (Rs)	48,712
Net of Tax (Rs)	105,775	Tax payable on interest @ 30%	14,614
		Net of Tax (Rs) (a)	104,098
		Rebate u/s 88 (b)	10,500
		Actual gain (a+b)	114,598

Case I

If 'A' invests Rs 70,000 in a Savings Bond in the cumulative option, his maturity value @ 7% p.a. compounded half yearly works out to Rs 105,775 which is completely tax free. However, his maturity value in case of NSC @ 9% p.a. compounded half yearly works out to Rs 118,712 on which he will pay Rs 14,614 tax (@ 30% on the interest income). A's maturity value in case of NSC after tax works out to Rs 104,098. In this case Savings Bond is more attractive even at such a low interest rate largely due to tax-free returns.

Case II

Since under this scenario 'A' is eligible for a rebate u/s. 88, on his investment of Rs 70,000 he will get a rebate of Rs 10,500 (15% of 70,000), which will be deducted from his taxable income. In this case his actual gain on the investment works out to Rs 114,598 (as per the table above), which is substantially higher than the investment in a Savings Bond.

To conclude, if an investor is eligible for a rebate u/s. 88, NSC is one of the best and the safest fixed income instrument after Public Provident Fund (PPF) and life insurance. However, if one has to look at it from a purely investment perspective, then the Savings Bond scores over NSC.

If you are in Mumbai and would like to invest in Savings Bond, Relief Bond, NSC or other fixed income instruments, please register here

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