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Whenever you discuss taxes either of two things happens – the people are unaware and therefore not interested or they are interested but the discussions are way too technical for a normal person. While most of us are familiar with the usual suspects like our Form-16 and ITR but there is still a lot beneath the surface. In this series, we will be bringing you the various aspects of taxation and tax-filing in form of simple discussion.
Let’s start with NSC or National Saving Certificates. This is one of the oldest schemes, backed by the government. It is perfect for those looking to make a small investment that will earn a guaranteed return while saving taxes on investments up to Rs 1.5 Lakh. Firstly we will develop a basic understanding discussing the NSC scheme, how NSC generate returns and its taxation policies, its benefits, procedure and requirement for investing in scheme then move on to a detailed discussion about the type of certificate, nomination option, withdrawal, cancellation and transfer policy. Finally, we will end our discussion with a comparative analysis between NSC and other small savings schemes like FDs, PPF and MF.
NSC or National Savings Certificate is a Government Savings Bond which is useful for a small investment and tax saving. National Saving Certificates were first introduced in the 1950s to facilitate the nation-building process. These certificates can be acquired by any Indian resident from any post office across India. It is a low-risk Government-backed initiative with a fixed return. This is usually preferred by investors who are unwilling to take risks or people who wish to expand their base by a fixed return initiative. Earlier, these came with two types of maturity period: one for 5 years and the other with 10 years of maturity period. As of latest update, 10 years National Saving Certificate is discontinued. There is no upper limit for investments in the National Saving Certificates but investments of up to Rs 1.5 lakhs in NSC’s is liable for tax reduction under section 80C of the Income Tax Act.
In recent times, the market has been flooded with many investment tools offering attractive interest rate, low-risk and tax benefits; choosing amongst them for putting your hard earned money is becoming harder every day. As such NSC offers a safe investment option which has stood the test of time.
NSCs are a short term investment option in which you basically make an initial investment and that investment earns a return at a rate fixed by the government. Once you have invested in the certificate, your interest for the year will be added to your investment and will restrict you to invest more in the same certificate. However, you can invest your desired amount in another certificate which can be purchased from any post office. The interest rate will remain fixed for the tenure of certificate and is equal to that offered at the time of purchase.
For NSCs, the interest is compounded annually and that is why it offers a higher return than any other scheme which you would just earn simple interest (ex Fixed Deposits). This means that the interest earned in a year is added to the principal for calculation of interest for following years. Also, you have the option of opting for tax exemption on interest earned under section 80C, further increasing the net return from the investment. Combining the benefits from tax saving on the initial investment, tax savings on interest earned, and the guaranteed returns offered makes NSC a favoured investment option.
The major difference between NSC and other saving schemes is the computation of interest. In NSC, the interest earned for one financial year is added to the principal amount for the next year. To understand this better, let’s take an example. Suppose, you have made an investment of Rs. 100 in National Saving Certificate and the interest will be computed annually at the 8% rate and will be payable at maturity. After the maturity period (5 years), the investment will grow to Rs. 144.23. Another major difference between NSC and other saving schemes is that in NSC, the income earned that is the return on investment can be considered for tax exemption while it is not possible for all other tax saving schemes.
Any individual interested in investing in NSC must
Prior to 2016 there were two categories of NSCs available for purchase NSC VIII Issue and IX Issue (details of which can be found below) and they offered varying interest rate, but since then Issue IX has been discontinued and the last issued certificate would mature in 2025.
The interest rate offered is linked to the 10-year government bond yields and are revised every three months.
The NSC interest rates are compounded annually however they are payable only after maturity. Below you can find the NSC interest rate chart
|Q1 FY 2019-2020 (April-June)||8.0%|
|Q2 FY 2019-2020 (July-September)||7.9%|
|Q3 FY 2019-2020 (October-December)||7.9%|
|Q4 FY 2019-2020 (January-March)||-|
NSC qualifies for tax deduction under Section 80C of Income Tax Act and therefore your investment up to Rs 1,50,000 would be eligible for tax deduction from income. One thing to keep in mind is that there is no upper limit on the amount invested in the scheme but you won’t get any tax relief for an amount exceeding Rs 1,50,000. Additionally, the accrued interests on the certificates are also added to the principal investment and thus they also qualify for a tax reduction.
For example, you are investing Rs. 1000 in the certificates and this makes you eligible for deduction in taxes on the principal amount for the first year. In the second year, you can ask for tax deductions on the investments that year as well as the interest accrued on the principal amount in the first year. You can claim tax deductions separately because the interest is added to the investment and is annually compounded.
Calculate your Tax Exemption: NSC TAX EXEMPTION CALCULATOR
The interest that is accrued each year is accumulated in the account and then gets added to the original investment in the NSC account. This accumulated interest gets a tax rebate under section 80C of the Income Tax Act.
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 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.
Let’s take an example, suppose you have invested Rs 10,000 in NSC that offers an interest rate of 8%, which would generate Rs. 800 as the interest at the end of the year. Now while filing your Income Tax return, you will have an option of declaring this income generated from interest as tax-deductible u/s 80C provided that you have not exhausted the limit of Rs 1,50,000 already. If you decide to declare the interest u/s 80C, the interest would be reinvested and added to the principal amount (making it Rs 10,8000). In case you have exhausted your limit of deduction under section 80C than the interest earned would be taxed and it won’t be reinvested. However, the interest earned on the investment in the last year is not tax-free since it can’t be added in the principal and is filed under ‘Income from other sources’.
Note: The maximum relief under section 80C is Rs 1,50,000. If you have already exercised the maximum relief then you won’t be able to avail benefit on interest earned u/s 80C and hence will be liable to pay taxes.
NSC is paid on maturity, this includes the invested amount and the interest earned.
The initial investment is tax-free provided that you have filled it for deduction u/s 80C. If you have been consistently availing tax rebate under section 80C, then upon maturity the interest earned in the last year will be taxed as it cannot be reinvested in the account.
In case you have not opted for tax relief than you would have to pay taxes on the interest earned. One thing to remember in this case is that there is no Tax Deduction at Source (TDS) in the case of NSC. It is your responsibility to file correct Income tax returns which should include the taxes payable on interest earned.
In short, the benefits offered by NSC are many and some of them are rather unique:
As seen, the NSC scheme offers many advantages but it also comes with several disadvantages. It lacks a few benefits which are offered by other investment schemes like
From July’16 onwards NSC can be bought in two modes, electronic mode (E-mode) or passbook mode. After the discontinuation of paper certificates, one requires a Savings Account (either with a bank or post-office) with or without Net Banking enabled to purchase the certificate.
Stepwise breakdown of the process-
The government has allowed Public Sector Banks and three Private Banks (ICICI, HDFC & Axis) to accept deposits under National Savings Certificate scheme, so account must be in one of these banks.
In case you don’t have the net banking services enabled, you can purchase the NSC in passbook mode. To get the passbook, follow the steps mentioned below:
As this process does not require you to provide your KYC details, it is much more convenient and hassle-free.
Earlier the process of buying NSCs was through Indian Postal Service only. The process is as follows:
Earlier, there were two types of NSCs: NSC Issue VIII and NSC Issue IX. The basic difference lies between their maturity rate and interest rate offered. However, NSC Issue IX has been discontinued since December 2015.NSC issue VIII
This issue of the National Saving Certificate is similar to its other counterpart except for the fact that it has a smaller maturity duration that is of 5 years and offers a slightly lower interest rate as compared to NSC Issue IX. All individuals are eligible for this certificate except for Trusts and HUF. These certificates can be issued in denominations ranging from Rs. 100 to Rs. 10,000.NSC issue IX
An exact replica of issue VIII this Certificates had a longer maturity duration that is of 10 years and offered a slightly higher return owing to the fact that investments were held for a longer duration. These certificates have been discontinued from December’15 and are no longer issued. Like NSC Issue VIII, even these certificates were issued in denominations ranging from Rs. 100 to Rs. 10,000. There was no upper limit for investments like Issue VIII.
As the name suggests, this type of certificate is designed to be issued to a single individual. The individual in whose name the certificate is issued has the choice of appointing the nominee but all the major decisions shall be taken by the individual and not the nominee. Such a certificate can also be issued in name of a minor to an adult, in this case, the adult should be the legal guardian of the minor.Joint A Type Certificate
This type of certificate is issued to two adults and when the certificate matures, the amount is payable to both. The decision making authority is shared by both the individuals and both holders signature would be required in case of cancellation, transfer or change of nominee.Joint B Type Certificate
Joint B Type Certificate is also issued to two individuals who share decision making authority. However, the maturity proceeds of this type of certificate are payable to only one individual amongst the two.
This is the form required for purchasing an NSC from the post offices. It is a two-page document which needs to be filled with relevant information regarding the investment amount, details of the individual purchasing NSC, and disclosure if the NSC is purchased on behalf of a minor. If a nominee is chosen, then you are supposed to fill necessary details in the designated space along with the signature of the individual and a witness. Receipt of Acknowledgement is at the bottom of the form, the next page is for official use and doesn’t concern us.
The form can be found on this link: https://www.indiapost.gov.in/VAS/DOP_PDFFiles/form/NC-71ApplnforPurchaseofNSC.pdf
You should see a form similar to the one which can be seen below:
In case you have not appointed a nominee at the time of purchase, you can appoint one later via this form. All you need is the identification and residential information of nominee along with necessary proofs. In case you want to nominate a minor, their details will be furnished in the same form along with the details of the guardian (if required). After providing all the information, submit the details of the certificate purchased for which the process of nomination is being done. To complete the process, your signatures will be required. If due to certain circumstances, you are unable to do so, the officials will take your thumb impression along with the signature of a witness acquainted with the Post office.
National Saving Certificate Form 2 (NC-51)/ NSC Nomination Form
You can find the form on the link attached: Post Office NSC Form 2 PDF
This form is used in case you want to change the nominee at any later stage. The form requires information about the new nominee along with the detailed information of the purchased National Saving Certificate. This form would require a witness from the post-office and has to be submitted at the same post-office from which the initial NSC was purchased.
National Saving Certificate Form 3 (SB-13A)/ NSC Nomination Form
You can find the form on this link: Post Office NSC Form 3 PDF
Yes, a partial amount can be withdrawn from the account after the girl child (benefactor) turns 18 for her marriage or higher studies. However, the partial amount being withdrawn cannot be more than 50% of the total amount.
Nominating a person is not mandatory but it is recommended as it benefits in case of a demise of the person holding the NSC. The proceeds from the NSC would go to the person nominated or in case of a minor, the adult responsible for the minor would be paid on their behalf. Few pointers to keep in mind while nominating are:
NSC investments have a lock-in period of 5 years and are not subject to early withdrawals for except some cases:
In case you have relocated from where you purchased the NSC and wish to shift the NSC to a new bank/post office, you will have to fill out Form NC-32. The form would require information about the holder of the certificate, details of the certificate, and nominee details. This form can either be submitted at the old or the new bank/post-office.
In case you want to transfer the ownership to another person, written consent from the postmaster of issuing post office would be required. Even after this, transferring ownership is possible only under specific conditions, namely
For transferring the ownership, Form NC-34 Annexure 2 needs to be filled and some important points you need to be cautious about:
Finally, by now you would have decided whether you want to invest in NSC or not and if you are interested the last pressing question would be are there any charges involved for investing in NSC. The answer is that a negligible amount of Rs 5 is to be paid whether
From July’16 the NSC are being issued in passbook and electronic form but for individuals who have already invested in this scheme losing their certificates are a big concern. Since in the end, NSC are paper certificates and can be easily damaged, destroyed and even stolen, and you have to hold them for durations of 5 years. Therein lies the risk of losing your certificate even before getting an option of encashing them.
However, there is a procedure for issuing duplicates in case originals become unfit to cash
Now that we have a solid understanding of various aspects of the National Securities Certificate, we can analyze it with respect to other saving schemes. Let’s see how is it different from other investment options.
We will be starting off with a comparative analysis between NSC and FD.
Suppose you invest Rs 1000 in NSC and the same amount in an FD offering a similar return of 8% (assuming, the current rates are different for NSC and FD but almost comparable). Both investments would earn a return of Rs 80 in one year. Now for the FD this return would be considered as income from other source and is subjected to TDS at 10% but for NSC the return is added to the principal amount and hence is tax exempt, meaning after 1 year the investments have following positions
|Return after 1 Year||Principal Amount||Interest||TDS||Net Income|
FD has a principal amount of Rs 1000, interest earned is Rs 80 and Tax deducted is Rs 8 and for NSC the principal amount increases to Rs 1080 (earlier principal + interest earned) and no tax deduction.
You can clearly see that as principal increases so do the interest earned and therefore the final maturity amount. As shown below the maturity amount from NCS is greater than that from FD even though both had similar starting principal, interest rate and duration.
|Investment Option||Principal||Interest Earned||Tax Deducted||Cumulative Amount|
Now, let’s compare NSC with Public Provident Fund (PPF). It is amongst the most popular tax-saving investment option for income class individuals.
Some major differences between the schemes have been highlighted below:
Besides these differences, the interest is compounded annually in both the schemes. For a better understanding of both the schemes, let’s operate on some assumptions:
|Investment Option||Year||Principal||New Investment/ Re-investment||Interest Rate||Interest Earned||Tax Deducted||Cumulative Amount|
Before we analyze the result it is necessary to understand that the calculations above will differ in real life.
Before we analyze the result it is necessary to understand that the calculations above will differ in real life.
Now assuming that you are only concerned with the money that you would have after 5 years and are not concerned with withdrawing the amount. Then:
Yes, it is as it give a taxpayer deduction for calculating income tax.
No, it is not mandatory to have an account in post office in order to encash NSC.
Investments are always best.Investing in both is worth it .
Yes, you can take provided interest received shoudl be reinvested in NSC.
Yes, it can be claimed but you have to file a request for duplicate NSC for that.
It is kept as collateral security if borrowers fail to pay the amount so that it can be monetized at that time.
No, Interest on NSC is considered in income.
All the above investments are safe investments. The investment with better interest ratio and withdrawal policy should be considered.
New interest rates is applicable for only on Fresh investment.
Yes, the maturity amount on this is Tax Free.
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