All you need to know about investing in the National Savings Certificate
Five reasons to invest in NSC:
- Save income tax up to Rs 1.5 lakh
- Guaranteed interest of 8.1% per annum
- Maturity period of only 5 years
- Easily available at all post offices
- Interest is compounded and reinvested by default
What is the National Savings Certificate?
The National Savings Certificate (NSC) is an investment scheme floated by the Government of India. It is a savings bond that allows subscribers to save income tax. There is no maximum limit on the purchase of NSCs, but investments of up to Rs 1.5 lakh in the scheme can earn a tax break under Section 80C of the Income Tax Act. The certificates earn a fixed interest, which is currently at the rate of 8.1% per annum. This interest is added back to the investment and compounded annually. These certificates can also be used as collaterals while taking loans from banks.
Who should invest in NSC?
Anyone who is looking for a safe investment avenue to save taxes can opt for the NSC. The NSC offers guaranteed interest and complete capital protection. Since it is backed by the government and can be bought from most post offices in India, the NSC is also more easily accessible than other tax-saving investments. However, the NSC cannot earn inflation-beating returns as compared to other tax-saving investments like tax-saving mutual funds and National Pension System.
What are the tax benefits of NSC?
Investments of up to Rs 1.5 lakh in the National Savings Certificate can earn the subscriber a tax rebate under Section 80C. Furthermore, the interest earned on the certificates are also added back to the initial investment and qualify for a tax break as well. For example, if you purchase certificates worth Rs 1,000, you will be able to get tax break on that initial investment amount in the first year. But in the second year, you will get a tax break on not only additional NSC purchases but also on the interest earned on the investment made in the first year. This is because the interest is added to the original investment and compounded annually.
What happens upon maturity of NSC?
The NSC VIII Issue comes with a lock-in period of 5 years. The interest that is earned every year is not paid back to the subscriber. Instead, it is reinvested and compounded annually. Only the interest that is earned in the last year has to be added to your taxable income. Upon maturity, you will receive the entire maturity value. Since there is no TDS on NSC payouts, it is the subscriber’s responsibility to pay the applicable tax on it.
What are the different types of NSC issues?
The NSC had two types of certificates–NSC VIII Issue and NSC IX Issue. The NSC IX Issue was discontinued in December 2015. Currently, only the NSC VIII Issue is open for subscription. There is no maximum limit on the purchase of these certificates. You can get them from most post offices in India. The current interest rate on the NSC VIII Issue, as of 1 April 2016, is 8.1% per annum. NSC certificates can also be transferred from one person to other as well as from one post office to another. A duplicate certificate can also be requested in case the original is misplaced or gets destroyed.
Is NSC better than other tax-saving investments?
NSC is one of the tax-saving investment options available under Section 80C of the Income Tax Act. The other popular options are Equity Linked Savings Schemes (ELSS), National Pension System (NPS), Public Provident Fund (PPF) and Tax-saving Fixed Deposits (FD). Here is how these tax-saving investments compare with each other:
|Investment||Interest||Lock-in Period||Risk Profile|
|NSC||8.1% (guaranteed)||5 years||Risk-free|
|ELSS funds||12% to 15% (expected)||3 years||Market-related risks|
|PPF||8.1% (guaranteed)||15 years||Risk-free|
|NPS||8% to 10% (expected)||Till retirement||Market-related risks|
|FD||7% to 9% (guaranteed)||5 years||Risk-free|
Can HUFs invest in NSC?The NSC compares well with other fixed income tax-saving investments like PPF and FDs. In fact, it has a much lower lock-in period than the PPF, but does not have the tax-free returns benefit of the PPF. But the NSC loses out to tax-saving mutual funds because these funds invest primarily in equities, which gives them the capability to earn higher returns over the long run.
The National Savings Certificate is promoted as a savings scheme for individuals, which is why HUFs and trusts cannot invest in it. Furthermore, even non-resident Indians (NRI) cannot purchase NSC certificates. The scheme is open to only Indian individual citizens and they can purchase certificates even in the name of a minor. NSC certificates can be held by an individual as well as jointly by two individuals.
Can loans be taken against NSC issues?
Subscribers of NSC can take loans from banks against their investments in this scheme. To do this, the certificate needs to be transferred from the holder to the bank. A transfer stamp will be put to the certificate by the postmaster of the post office from where it was purchased. While loans can be taken against NSC certificates, they cannot be withdrawn prematurely by the subscriber.