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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
Last updated on April 16th, 2021

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It is important to note that, if the certificates are withdrawn before completion of 1 year, you will not receive the interest amount only the principal amount.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.

  3. The benefit Section 80EEB can be claimed by individuals only. An individual taxpayer can claim interest on loan of an electric vehicle of up to INR 1.5 lacs u/s 80EEB. However, if the electric vehicle is used for the purpose of business, the vehicle should be reported as an asset, loan should be reported as a liability and the interest on loan can be claimed as a business expense irrespective of the amount. (We have updated the article with the changes).

    Thus, if you have a proprietorship business, you should claim interest amount as a business expense only if the vehicle is used for business purpose. However, if it is used for personal purpose, you can claim deduction of interest u/s 80EEB in your ITR since you would be reporting both personal and business income in the ITR (under your PAN).

    As per the Income Tax Act, the deduction under Section 80EEB is applicable from 1st April 2020 i.e. FY 2020-21.

  4. Hey @Sharath_thomas , we have updated the content according to the appropriate assessment year. Thanks for the feedback. :slight_smile:

  5. Hey @shindeonkar95

    In case of capital gain income (LTCG/STCG), transfer expenses are allowed as deduction, except STT.

    However, in case of business income (F&O, intraday), all expenses incurred for the business (including STT) are eligible to claim deduction in ITR.

    Hope, it helps!

  6. Hello,

    Is it possible to claim deductions under S. 80CCF for Infra bonds bought in the secondary market and held to maturity?

    There were a number of 10 year infra bonds issued in the 2010- 2013 period, which will start maturing soon. These are all listed on the exchanges (although hardly any liquidity or transactions in them). If I were to buy some of these bonds in the open markets and hold them in my demat to maturity (<3 years), is it possible to claim tax deductions (upto 20k per year) under 80CCF for buying?

    I couldn’t find anything on this. Any help is appreciated.

  7. Hello @Veejayy,

    Yes you can claim deduction under 80CCF for investment made in specified infrastructure and other tax saving bonds bought in the secondary market and held to maturity.

    Deduction under Section 80CCF can be availed only through investment in certain tax saving bonds, issued by banks or corporations after gaining permission from the government which shall be restricted upto 10,000 per year.

    These bonds are generally long term bonds, having tenure of more than 5 years with a lock in period of 5 years in most of the cases. These bonds can be sold after the lock in period!

    Also, interest earned on these bonds will be taxable.

    Hope this helps!

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