National Savings Certificates: Meaning, Interest Rates, and Tax Benefits

The annual interest that is earned is collected in the account and added to the initial investment in the NSC account. According to section 80C of the Income Tax Act, this cumulative interest is tax-deductible.

The interest on NSCs can only be reinvested for a total of four years due to their five-year maturity period. As soon as the investment reaches maturity, the investor receives the interest generated during the fifth year. Therefore, the tax benefit is essentially only available for the first four years of the investment period. In the fifth and final year, interest is earned, it is taxed.

Consider the following scenario: Suppose you invested Rs. 10,000 in an NSC that pays an interest rate of 8%. At the end of the year, this investment would have generated Rs. 800 in interest. Now that the ceiling of Rs 1,50,000 has not yet been reached, you will have the option to declare this interest income as tax-deductible under Section 80C when filing your income tax return. If you choose to claim the interest under Section 80C, it will be reinvested and added to the principle sum (making it Rs 10,8000). The interest earned will be taxed as Income from other sources and deduction for reinvestment of this interest cannot be claimed if your Section 80C limit has been reached.

Note: Rs. 1,50,000 is the maximum relief available under section 80C. If you have already used up all of your tax benefits, you won't be able to benefit from interest reinvestment of NSC under Section 80C and will therefore be required to pay taxes.

When NSC matures, both the invested money and the interest are paid.

The original investment is tax-free at the time of withdrawal. Since the maturity period of NSC is five years, the interest can be re-invested only for four years. The interest earned in the fifth year comes in the hand of investor along with the maturity amount. So basically, the tax benefit is availed only on the initial first four years of the investment period. The interest earned in the fifth and final year is taxable.

If Section 80C limit is exhausted benefit of reinvestment of interest from NSC cannot be claimed and therefore, you would be required to pay taxes on the interest you earned. One thing to keep in mind in this situation is that NSC does not qualify for Tax Deduction at Source (TDS). You are responsible for filing accurate income tax returns, which must reflect the taxes due on interest income.

In summary, NSC offers a wide range of benefits, some of which are quite recognizable:

• With the exception of last year, interest earned is almost completely tax-free.
• Section 80C of the Income Tax Act exempts the invested amount from taxes.
• There is no maximum investment amount and one can start investing with as little as ₹ 100.
• Higher returns are obtained as a result of the compounding of interest.
• NSC can also be taken on a minor's behalf.
• NSC is a type of collateral that can be used to secure bank loans.
• A government-backed, low-risk investment choice.
• Among other fixed rate investment options, highest return rate.
• Since they are accessible at all post offices, investing in them is simple.
• If the original certificate is misplaced or harmed, a copy can be arranged.

NSC can now be purchased in two ways: electronically (E-mode) or using a passbook. It is now necessary to have a savings account (at a bank or post office), with or without net banking.

Finally, you have probably already made up your mind about whether or not you want to invest in NSC, and if you do, the final important question is if there are any fees associated with doing so. The answer is that a minimal fee of ₹ 5 must be paid regardless of whether:

• One individual transfers ownership to another.
• The certificate is cashed, and the post office is where the Certificate of Discharge is obtained.
• The second certificate is given out.
• The certificate's denomination is altered.
• Following the purchase of a certificate, the nominee may be altered or chosen.

When submitting an ITR, you can demonstrate the NSC interest earned in the following methods:

Under Income from Other Sources, you have to disclose the interest you received from NSC. Alongside you can claim the deduction under Section 80C for re-investment of interest until first 4 years.

You should be aware that the interest on NSC is compounded annually. This means that in order to determine the principal amount for the second year, the interest you calculate on the primary amount invested in NSC should be added to the principal amount.

No, Non Resident Indians are not allowed to invest in NSC.

The bare minimum investment in NSC is ₹ 1000.

The following are the main requirements for investing in National Savings Certificates:

• Investment in NSCs is open to all Indian residents.
• Investors in NSCs may be individuals acting alone or in a group of up to three adults, guardians acting on behalf of a minor, a person of unsound mind, or a minor above the age of ten.
• Indians who are not residents cannot buy brand-new NSCs. However, such NSCs can be kept until maturity in the event that resident NSC subscribers become NRIs prior to the maturity of the certificates.
• Neither trusts nor Hindu Undivided Families (HUFs) may invest in NSC. Only Karta of HUFs can invest in NSC in his own name.

Under Section 80C of the Income Tax Act of 1961, investments in NSC are eligible for tax benefits of up to ₹ 1.50 lakh. In addition, for tax reasons, the yearly interest earned on NSC assets is regarded as a fresh investment. TDS is not required to be paid on NSC, but it is required to be paid on interest generated.

The number of NSCs that one can purchase has no maximum limit. NSC investments, however, must be made in multiples of Rs. 100.