In this article, I would like to highlight 7 things about National Savings Certificate which someone must know before deciding whether to invest or not. In one of my previous articles called National Savings Certificate (NSC), I had talked about the product, its features and benefits. You may want to read it to get some basic idea about NSC.
The 7 things about National Savings Certificate to know before investing
National Savings Certificate (NSC) scheme was launched by the Government of India to promote the habit of savings among the common man in India. The money is collected through the Post Office and is used for development of country. In terms of safety, NSC is a safe product as it is backed by the Government.
National Savings Certificates are issued in denominations of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000 and Rs. 10000.
- Who can buy NSC?
Only resident Indians are allowed to purchase NSC. Non-Resident Indians (NRI) are not eligible to purchase NSC.
- Interest Rate
The interest rate of NSC is announced every year before 1st April and may change from year to year. Interest rate is compounded half-yearly. There is no Tax Deduction at Source (TDS).
- NSC Interest income is taxable
Interest income on National Savings Certificate is taxable under Income Tax act. However the interest in not paid out to the investor but is rather re-invested back into the scheme.
- NSC Tax Benefits
A tax payer can claim tax deduction under Section 80C of his NSC investment subject to an upper limit of Rs 1.5 lakhs. Since each year’s interest is considered reinvested for next year, it qualifies for a fresh deduction under Section 80C of Income Tax Act.
The table below illustrates what I am trying to say.
Mrs. Kunjakamini invests Rs. 1 lakhs in NSC in Year 1.
In that year she will be able to claim Rs 1 lakhs deduction under Section 80C of Income Tax Act
In Year 2, she earns Rs. 8681 as NSC interest income. However, since NSC is deemed re-invested, she can claim deduction of Rs. 8681 under Section 80C (subject to overall limit of Rs 1.5 lakhs). Therefore, although National Savings Certificate income is taxable, Mrs. Kunjakamini need not pay any tax on that amount.
The interest accrued in the final year does not receive a tax deduction as it is not reinvested but rather paid back to the investor along with the interest of the earlier years and the initial investment.
- Use as collateral security
In order to avail a loan from bank, one may use NSC as collateral security. For financing my MBA, I had pledged my National Savings Certificates to avail my educational loan. It becomes very easy to get a loan if one has NSC that can be hypothecated.
A Few Last Words
I hope you found this article useful. If you have any comments please feel free to reach out to me.
Before making any investment decision, please contact your financial adviser. I have provided this article for educational purpose only.