1. National Savings Certificate
Individuals mainly use NSC for small and medium investments as well as for tax-saving purposes. A fixed income instrument like Public Provident Fund and Post Office FDs, this scheme too is a secure and low-risk product. You can buy it from the nearest post office in your name, for a minor or with another adult as a joint account. They come with 2 fixed maturity periods – 5 years and 10 years.
There is no maximum limit on the purchase of NSCs, but investments of up to Rs 1.5 lakhs 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. They add this interest back to the investment and compound it annually. Many pledge these certificates for taking loans from banks.
2. Who Should Invest in NSC?
Anyone who is looking for a safe investment avenue to save taxes while earning a steady income can opt for this scheme. The NSC offers guaranteed interest and complete capital protection. However, like most fixed income schemes, they cannot deliver inflation-beating returns like tax-saving mutual funds and National Pension System. The government has made it easily accessible for prospective investors by making it available in post offices.
Let us also clarify on who cannot invest in this scheme, while at it. Basically, the Government has promoted National Savings Certificate as a savings scheme for individuals. Hence, Hindu Undivided Families (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.
3. Features & Benefits of NSC
a. Fixed income: You get guaranteed returns (7.8% annual interest) and enjoy a regular income.
b. Types: The scheme originally had two types of certificates -NSC VIII Issue and NSC IX Issue. The Government discontinued NSC IX Issue in December 2015. So, only the NSC VIII Issue is open for subscription currently.
c. Tax saver: As a government-backed tax-saving scheme, you can invest for up to Rs 1.5 lakhs.
d. Start small: You can invest as small as Rs. 100 (or multiples of 100) as an initial investment and increase the amount when feasible.
e. Interest rate: Currently the rate of interest 7.8% annually – the government revises this rate every quarter.
f. Maturity period: There are two maturity periods to choose from – one for 5 years and the other for 10 years.
g. Access: You can purchase this scheme from any post office by submitting the necessary documents and doing the KYC process. It is easy to transfer it from one PO to another too.
h. Loan collateral: Banks and NBFCs accept NSC as collateral or security for secured loans. To do this, the concerned post master should put a transfer stamp to the certificate and transfer it to the bank.
i. Power of compounding: Interest gets compounded and reinvested by default, though the returns do not beat inflation.
j. Nomination: Investor can nominate a family member (even a minor) so that they can inherit it in the unfortunate event of the investor’s demise.
k. Corpus after maturity: Upon maturity, you will receive the entire maturity value. Since there is no TDS on NSC payouts, the subscriber should pay the applicable tax on it.
l. Premature withdrawal: Generally, one cannot exit the scheme early. However, they accept it in exceptional cases like the death of investor or with the court order.
4. Tax benefits of NSC investment
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. 1000, you are eligible for a tax respite on that initial investment amount in the first year. But in the second year, you can claim a tax deduction on the NSC investment(s) that year and also on the interest earned in the first year. This is because the interest is added to the original investment and compounded annually.
5. Comparing NSC with 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|
|ELSS funds||12% to 15%||3 years||Market-related risks|
|NPS||8% to 10%||Till retirement||Market-related risks|
|FD||7% to 9%||5 years||Low-risk|
Now that you know everything you need to know about NSC, is this scheme for you? If it is fixed income and tax-efficiency you are looking for, you can consider NSC.