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National Savings Certificate (NSC): An Attractive Risk-Free Tax Saving Investment For Fixed Income

Personal Finance
National Savings Certificate (NSC) is similar to a term deposit. It is a fixed return investment scheme offered by the government and implemented through the India Post.

National Savings Certificate (NSC) is one of the most suitable options for conservative investors seeking consistency in returns, and for those looking to diversify their investment portfolio beyond bank deposit schemes. NSC is a fixed return investment scheme offered by the government and implemented through the India Post.

The minimum investment in the scheme is Rs 100 and additional investments can be made in the multiples of Rs 100. There is no cap on the maximum amount of that one can invest in the scheme. NSC is similar to a term deposit. However, investments in NSC have a five-year lock-in.

This scheme scores over the traditional bank fixed deposits on two parameters. First, the interest rate currently is higher than what banks offer. The rates for all small saving schemes, including NSC, are modified every quarter and the same is notified by the government. However, the interest rate prevailing at the time of investment will hold good till maturity.

The current interest rate is 7.6 per cent. Banks currently offer interest rates of 6 to 7.2 per cent on fixed deposit schemes for five years. The safety profile of NSC, guaranteed by the government, is also higher than that of FDs. The interest payment under the scheme is made at the time of maturity, and hence this will suit investors who have enough liquidity and are not dependent on interest income for their regular needs.

Also, the interest is compounded annually. For instance, if you invest Rs 1000 in one year, the amount will become Rs 1442 at the end of year five, assuming the interest rate is 7.6%.

Also, the investment and the interest earned under the scheme are eligible for tax deduction under section 80C up to Rs 1.5 lakh. For example, if you purchase certificates worth Rs 20,000, you are eligible for the tax benefit on this amount.

And in the second year, if you invest an additional Rs 5,000 and earn an interest of Rs 760 on the first year’s investment, you can claim a deduction of Rs 5,760. However, since the interest income of the fifth year is paid out and not re-invested, hence that is not eligible for the section 80C tax deduction. Also, the entire interest income earned over the five years is taxable. There is no tax deducted at source tough.

The investor has to pay the applicable tax.

How can you invest?

Open an account at the nearest post office after submitting the documents required to complete the know-your-customer process, along with the application form and other requisite documents. In case you move cities, you need not fret. It is easy to transfer the certificate from one post office to another.

Who can invest?

The scheme is open only to individual resident Indians. Though the scheme has a five-year lock-in, in case of emergencies, one can use NSC as collateral to borrow from banks and NBFCs. Most banks offer secured loans backed by NSC. However, one needs to get a transfer stamp from the post office on the certificate and transfer it to the lending bank. An investor in NSC can nominate a family member (including minors). The nominee (even if not the legal heir) in an NSC instrument gets the money in the event of the investor’s demise.

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