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National Savings certificates: What are the tax exemption benefits of this instrument?

What is a National Savings Certificate (NSC)?

It is a fixed income instrument by the government that can be bought from a post office in India in the name of an individual, minor or as a joint account with another person. NSC is of two types depending on the period of maturity - 5 and 10 years. 

Interest is compounded annually at a rate of 7.9% per year, for National Savings certificates bought on or after October 1, 2019. There is no purchase limit on the number of NSCs.

Can National Savings certificates help save tax?

NSC is not only is a safe avenue of investment for small to middle-income investors, but it also helps them reduce their tax outgo. There are three tax benefits of investing in National Savings certificates as explained below:

  • Tax deduction on the amount invested: One of the most notable tax benefits of investing in National Savings certificates is that upto ₹1.5 lakh invested in them makes you eligible for tax deduction under Section 80C, as per the Income Tax Act 1961.

  • Save tax on interest: Not only the principal amount invested in National Savings Certificates, but the interest earned for the year (except the final year) is exempted from tax. It is a cumulative scheme in which the interest is not paid directly to the investor, but is invested and thus accumulates over the years. This reinvested interest is eligible for a tax deduction as per Section 80C and hence is tax-free. The interest in the year of maturity of a NSC is returned to the investor along with that of previous years as well as the principal and hence does not qualify for tax deduction, unlike previous years.   

  • No tax deduction at source (TDS): TDS does not apply on the interest amount of NSC, unlike fixed deposit.

Here is an example that shows the benefit of Section 80C deduction being received on the interest amount that is re-invested:

For instance, Ashish invested ₹ 50,000 in a 5 year NSC. Assuming an interest rate of 8%, the tax benefit that he can claim for the next 5 years would be as under:

YearPrincipalInterestThe amount eligible for exemption
1 ₹50,000 ₹4,000 ₹50,000+ ₹4,000
2 ₹54,000 ₹4,320 ₹ 4,320
3 ₹57,320 ₹4,585 ₹4,585
4 ₹61,905 ₹4,952 ₹4,952
5 ₹66,857 ₹5348 NIL

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