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NSC ( National Savings Certificate ) - Features, Tax Benefits and Eligibility

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Hiral Vakil

Income Tax
NSC
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Tax Savings & Deductions

NSC is a small savings scheme offered by the Indian Post office. The certificates earn fixed interest, which is currently at 6.8% per anum. You can get a tax deduction on your investment. However, returns earned are taxable at maturity. This article will help you understand the various aspects that you need to consider when investing in NSC.

What is NSC?

NSC is a scheme which encourages small to mid-income investors to invest in savings scheme which will also help them in availing tax benefits and having a risk-free return on investment. This scheme is popular amongst government employees and other salaried taxpayers. However, it does not earn inflation-beating returns like Tax saving Mutual funds.

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What are the Features of NSC?

Who is Eligible to Invest in NSC? 

The government launched NSC as a saving scheme for residential individuals. National Savings Certificate aims to offer capital protection, even though the rate of interest is less than tax saving mutual funds or Public Provident Fund, the return is in this scheme is a guarantee.

What are the Tax Benefits of NSC?

Deposits up to INR 1,50,000/- per annum qualifies for IT deduction under section 80C of the Income Tax Act. The interest earned is taxable. But each year the interest considered is reinvested in the NSC. This means that every year you show the interest amount as income and then reinvest that income. Since it is deemed reinvested, it qualifies for a fresh deduction under Sec 80C, thereby making it tax-free. When the certificates mature it does not receive any tax deduction since the amount is not reinvested. The investor will have to pay tax on the final interest.

What are the Documents Required to Purchase NSC?

You must be KYC compliant to purchase National Savings Certificate.

What is the Premature Withdrawal Procedure of NSC?

Even though NSC has a lock in period of 5 years, premature withdrawals are allowed in the following scenarios:

It is important to note that, if the certificates are withdrawn before completion of 1 year, you will not receive the interest amount only the principal amount. If the certificates are withdrawn after the completion of 1 year than the entire contribution as well as interest will be received.

Following documents are necessary for the withdrawal process:

Comparison with other Tax Saving Schemes

Investment Interest Lock-in Period Risk Profile
NPS 8% to 10% (expected) Till retirement Market-related risks
ELSS 12% to 15% (expected) 3 years Market-related risks
PPF 7.9% (guaranteed) 15 years Risk-free
FD 7% to 9% (guaranteed) 5 years Risk-free
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FAQs

Is the maturity value of NSC taxable?

Interest earned on the maturity of is taxable. During the investment tenure, annual accrued interest is not paid to the investor but instead, it is deemed reinvested. Since it is reinvested, it qualifies for deduction under section 80C thereby making it tax-free. However, when the NSC matures, the interest of the sixth year is not reinvested but paid out to the investor. So this interest amount upon maturity is not taxfree.

Is NSC one time investment?

NSC is a one-time investment. You can invest a minimum of Rs. 100 and there is not an upper limit for investment. Once you invest , then you will receive the maturity amount after 5 years of the lock-in period.

Can HUF invest in NSC?

No. HUFs and Trusts can not invest in NSC. The scheme is specially designed for Government employees, businessmen and other salaried classes.

Is there a lock in period in NSC?

Yes, the lock-in period is equal to the maturity period of the certificates i.e. 5 years. One can redeem it early but only under specific conditions.

Am I allowed to take a loan on the basis of NSC?

Yes, one can take a loan by keeping their certificates as collatral.

Can the nomination be changed in NSC?

Yes, nomination can be canceled or changed at any time by filling Form 3 and paying a nominal fee of INR 5.

Got Questions? Ask Away!

  1. Hey @sushil_verma

    There are a wide range of deductions that you can claim. Apart from Section 80C tax deductions, you could claim deductions up to INR 25,000 (INR 50,000 for Senior Citizens) buying Mediclaim u/s 80D. You can claim a deduction of INR 50,000 on home loan interest under Section 80EE.

  2. Hey @Dia_malhotra , there are many deductions that you can avail of. Your salary package may include different allowances like House Rent Allowance (HRA), conveyance, transport allowance, medical reimbursement, etc. Additionally, some of these allowances are exempt up to a certain limit under section 10 of the Income Tax Act.

    For eg,

    • Medical allowance is exempt up to INR 15,000 on a reimbursement basis.
    • Children education allowance is exempt up to Rs. 200 per child per month up to a maximum of two children.
    • Conveyance allowance is exempt up to a maximum of Rs. 1600 per month.

    Tax on employment and entertainment allowance will also be allowed as a deduction from the salary income. Employment tax is deducted from your salary by your employer and then it is deposited to the state government.

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