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National Savings Certificate (NSC) is one of the investment options the Government of India offers. NSC investments are received and serviced by the National Small Savings Fund, managed by the government through the interface of post offices.
What are NSCs?
NSCs are fixed-income investment options for resident individuals, wherein the interest rate remains fixed for the entire investment period. HUFs (Hindu Undivided Families) or Non-Resident Indians cannot invest in NSCs. NSCs are issued for a fixed tenor of 5 years with interest payable on maturity.
The interest rates on the National Savings Certificate scheme are notified by the government at the beginning of every quarter, and such interest rates apply to the NSC investments received during the quarter. The current notified interest rate in National Savings Certificate for the quarter from April 1, 2022 onwards is 6.80% per annum. (Source – https://www.nsiindia.gov.in)
Considering the current interest rate, Rs. 1 lakh investment grows to Rs. 1.39 lakh in 5 years with interest compounded annually but payable on NSC maturity.
Who can invest in NSCs?
Any individual can invest in NSCs either in their own name or in the joint name (maximum three joint holders allowed) or in the name of a minor or a person of an unsound mind. There is no restriction in the number of NSCs one can purchase or the maximum amount for which NSCs can be purchased. However, the minimum investment in National Savings Certificate must be Rs. 1000 and multiples of Rs. 100 thereafter.
NSCs cannot be withdrawn prematurely except in case of death of all the holders or on pledge revocation by a Gazetted officer or by a court order. However, the investor can pledge such NSCs as security for loans.
Tax benefits on the amount invested in NSCs
Per Section 80C of the Income Tax Act, one can avail of a deduction of up to Rs. 1.50 lakhs from the taxable income for making certain eligible payments or investments. Such payments include repayment of home loan, payment of life insurance premium, contribution towards employee provident fund, contribution in Public Provident Fund, etc. NSCs also feature as one of the eligible investment options for claiming tax deduction under Section 80C. Taxpayers can claim tax deductions up to the investment amount in NSCs, subject to the overall ceiling of Rs. 1.50 lakh under the section for all the eligible payments and investments in aggregate.
Taxation of interest income from NSCs
While the interest from NSCs is received on maturity and no TDS is deducted on NSC interest, the interest income is taxed on an accrual basis. This implies that the interest income for the year is added to the regular taxable income while preparing the income tax return and taxed accordingly.
Since the interest amount is reinvested and compounded in NSC itself, the interest income during all the years except the maturity year becomes eligible for deduction under Section 80C as the amount invested. Since the investor receives the interest income in the maturity year, such an amount cannot be assumed as the amount reinvested in NSCs. Thus, is not eligible for a tax deduction during that year.
As such, effectively, the interest income from NSCs gets added to the taxable income during all years, and the taxpayer can claim a tax deduction of an equal amount in all the years (except the maturity year and subject to the aggregate limit of Rs. 1.50 lakh under Section 80C).
With the safety of the Central Govt. for the amount invested, tax benefits and relatively better interest rates than other prevailing fixed-income investment options, investors can consider investing in NSCs as a safe investment option.
Disclaimer:
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The tax provisions mentioned above are updated as per the Union Budget 2022 presented in the Parliament in February 2022. The tax provisions may be subject to interpretation and changes at a later date. You may consult a professional tax advisor for personalized tax advice.
