After the latest quarterly revision of interest rates on small savings schemes, return on the National Savings Certificate (NSC) has moved up sharply from 7 per cent to 7.7 per cent. This rate can be locked into for five years, for investments made anytime during April 1- June 30, 2023.
The offering is at a premium of about 50-60 basis points over the yield on comparable 5-year government security, which closed at 7.16 per cent on March 31. Investors should make full use of the opportunity and allocate a portion of their savings to this instrument for three reasons:
One, similar to G-Secs, the NSC offers zero credit risk, as it enjoys sovereign guarantee. Five-year FD rates at few small finance/private banks are at a premium to the NSC. However, while bank deposits are generally considered safe too, there is deposit insurance cover only upto ₹5 lakh, should anything go wrong.
Two, while the RBI floating rate bonds 2020 — another sovereign instrument — offers 35 basis points over and above the NSC and may look attractive, one cannot lock into this rate. When the rate cycle turns, the returns will get reset downwards too, during the 7-year tenure of the instrument. Also, interest is compounded annually in the NSC, while the floating rate bonds offer only a payout option.
Three, a 7.7 per cent pre-tax yield implies positive real returns after accounting for inflation, for those in the lower tax brackets. For those opting to pay tax under the old regime, investments up to ₹1.5 lakh enjoy Section 80C deduction, pegging up the effective return.