NSC – National Savings Certificate | What , How, Tax, Interest, Benefit, Lock In Etc
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.
How does investing in NSCs generate a return?
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.
Who can invest in NSC?
Any individual interested in investing in NSC must
Be a resident of India.
Age is not a restriction, in case of a minor an adult can issue a certificate on his behalf. Under these circumstances, the adult must be the legal guardian of the minor.
Possess Identity and Residential Proof (in form of Aadhaar Card, PAN Card, Voter ID, Drivers License or any other document required by post-office/bank).
Non-residents cannot invest in National Saving Certificates. However, if a resident holding an NSC certificate becomes an NRI, then they can hold the certificates till maturity.
This scheme is for individuals and restricts Trusts and Hindu Undivided Family from making an investment in NSCs. Although, a karta of a HUF can invest in the NSC in his/her own name.
What is the interest rate offered by NSC?
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 rate generally falls in between 7.5% to 8.5% depending upon bond yield.
The current NSC interest rate for the third quarter of the FY 2019-20 is 7.9% (October 2019 - December 2019).
Interest rate for the second quarter (July 2019 - September 2019) was the same as the fourth quarter.
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)
Q2 FY 2019-2020 (July-September)
Q3 FY 2019-2020 (October-December)
Q4 FY 2019-2020 (January-March)
Is NSC tax-free?
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.
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.
Is NSC taxable on withdrawal?
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.
What are the advantages of investing in NSC?
In short, the benefits offered by NSC are many and some of them are rather unique:
The interest earned is virtually tax exempted barring for last year.
Invested amount is tax exempted under section 80C of Income Tax Act.
One can make investments starting from Rs 100 and there is no upper limit on the invested amount.
Interest earned is compounded, resulting in higher returns.
NSC can also be taken on behalf of a minor.
NSC can be used as collateral for securing loans from banks.
Low-risk investment option with Government backing.
Highest return rate amongst other fixed rate investment options.
Easy investment option as they are available at all post offices.
A duplicate certificate can be arranged if the original is lost or damaged.
What are the disadvantages of NSC?
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
It does not offer a reinvestment option, so you would have to buy a new certificate every time you decide to invest in this scheme.
The interest rate offered is fixed and hence may not offer real returns if they fall below inflation.
The proposed e-mode for purchase is still not available at many post-offices and national bank.
Where and how one could buy NSCs?
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.
How to buy NSC form online?
Stepwise breakdown of the process-
Open a savings account in a National Bank/Post-Office
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.
Get Net Banking Services Activated for your account.
You would then be able to buy NSC in e-mode through the net banking portal.
How to buy NSC in Passbook Mode?
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:
Open a savings account in a National Bank/Post-Office.
The government has allowed Public Sector Banks and top three Private Banks (ICICI, HDFC & Axis) to accept deposits under National Savings Certificate scheme, so you should have an account in one of these banks.
Purchase the certificate through a bank. The bank will issue the NSC passbook and like all other transactions, these transactions will also be recorded in the passbook.
The passbook would then have to be signed and stamped by authorized official.
One can also transfer their already bought NSC from passbook or paper mode to electronic mode. For this, you will have to visit the bank/post-office from where you purchased the original NSC, provide the details of the certificate and collect the certificate in e-mode. In this case, the bank would collect and destroy the previously issued passbook.
As this process does not require you to provide your KYC details, it is much more convenient and hassle-free.
How to get NSC from the Post Office?
Earlier the process of buying NSCs was through Indian Postal Service only. The process is as follows:
Go to the nearest post-office branch, collect the NSC application form (Form-1) and fill the basic information about yourself and the amount to be invested.
Attach the required supporting documents: Recent photograph, Identity Proof and Address Proof (Aadhaar Card, PAN Card, Voter ID/ Driving License/ Rental Agreements for Residential Proof).
Deposit the amount to be invested (deposit can be made through cash, cheque or Demand Draft and name a beneficiary).
Collect and check the issued NSC for any mistakes and errors.
Modes and types of National Saving Certificate
Types of NSCs:
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.
Modes of NSC:
Single Holder Certificate
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.
What are the forms required for investing in NSC?
Form 1: Application Form for Post offices
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.
You should see a form similar to the one which can be seen below:
Form 2: Nomination Form
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
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
How to nominate someone in NSC and is there any benefit of nomination?
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:
Nomination can be done through either Form 1, 2 or 3.
Nomination and change of nomination should be done through the same bank/post office from where the NSC was initially bought.
Nominee details would have to be provided to the bank/post office.
If the holder of the NSC passes away without nominating anyone the proceeds would go to their legal heir.
In case the certificate has been purchased on behalf of a minor, nominating is not an option.
In case the NSC has been purchased on different dates or from different post-offices, then separate nomination forms would be required (for paper mode).
Terminating/Withdrawing NSC before maturity period
NSC investments have a lock-in period of 5 years and are not subject to early withdrawals for except some cases:
The person holding the certificate passes away or forfeits them.
Court dictates that the NSC be paid early.
In any case, the amount received would depend upon the length of holding period, that is if the NSC is prematurely terminated within a year of purchase then only the initial invested amount would be returned.
If the NSC is prematurely terminated in between years 1 to 3, then the initial investment plus simple interest compounded annually would be paid.
Shifting or Transferring of NSC:
How can I shift NSC from one post-office to another?
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.
How can I transfer ownership of NSC to another person?
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
From Original holder to court of law or another person directed by the court.
Original holder to the nominee in case of death of original holder.
In case of joint holding, ownership can be transferred from one holder to another.
For transferring the ownership, Form NC-34 Annexure 2needs to be filled and some important points you need to be cautious about:
Firstly, ownership can only be transferred after a year from the sale of the certificate. In case, you transfer the ownership before one year, it will get legal sanction only after a year
Signatures of both the holders are required in case of joint holding
In case the NSC is being held on behalf of a minor than you would have to prove that transferring the ownership is in the best interest of the child and that the child is alive and well
The process of transferring ownership is as follows:
The owner along with the new owner will have to apply for transferring ownership.
Bank/Post Office will investigate the case and if no issues arise they would transfer the ownership to the new owner.
After the transferring of ownership, the previous owner will also be barred from accessing the e-mode of NSC.
If the NSC was in passbook mode, the bank/post-office shall collect the passbook from the previous owner, cancel out all the details related to him and fill in the details of the new owner.
Above steps will be undertaken by only authorized official.
What are the various charges in the NSC scheme?
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
Ownership is transferred from one person to another.
The certificate is cashed and Certificate of Discharge is collected from post-office.
The duplicate certificate is issued.
Denomination of the certificate is changed.
The nominee is changed or appointed after the purchase of a certificate.
What to do if one loses their NSC certificates?
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
Fill out Form NC-29 and submit it to the issuing post-office or any nearby post-office.
The form would require your details along with the details of the original certificate/s issued.
Reason for applying for duplicate NSC has to be mentioned in the form itself.
The original certificate would be required as a proof of destruction, defacing. In case the original is not available, an indemnity bond will be required for certificates with a value higher than Rs. 500 that will either have a guarantee from the bank or is backed by securities.
If the duplicate certificate is issued then it is only redeemable at issuing post-office
NSC and other saving schemes
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.
How is NSC different from FD?
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
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.
How is NSC different from PPF?
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:
Reinvesting is not an option in NSC while in case of a PPF account, investment can be made throughout the tenure of the account.
For PPF account, the tenure is 15 year while for NSC tenure is only 5 years.
In PPF account, the interest rate is revised every quarter while for NSC the interest rate is fixed throughout the tenure.
In PPF account, interest earned is tax exempted while it may not be the same for NSC .
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:
We will assume a similar interest rate of 8% for both (as for both the interest rate falls close to 8%).
Consider a tenure of 5 years only.
We will assume that the same principal amount of Rs 1,00,000 is initially invested in both schemes.
In case of NSC, we would be purchasing new certificates worth Rs 10,000 for year 2-5 and for PPF account we will make reinvestment of equal amount in year 2-5.
Finally, we would calculate the amount accumulated at the end of the 5th year.
New Investment/ Re-investment
Before we analyze the result it is necessary to understand that the calculations above will differ in real life.
The interest rate for PPF account could change.
The tenure differs for both the schemes.
Before we analyze the result it is necessary to understand that the calculations above will differ in real life.
The interest rate for PPF account could change.
The tenure differs for both the schemes.
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:
PPF would yield more return due to slightly better interest rate offered.
For every NSC bought you would have to pay taxes on interest earned in the fifth year.
* For Initially Bought NSC Certificate:- Rs 544.20 is the tax to be paid on last year interest earned (assuming income tax bracket is 5%)
Frequently Asked Questions
Q- Is it a good idea to invest 1.5 lakhs in National Savings certificate for a period of 5 years?
Ans. Yes, it is as it give a taxpayer deduction for calculating income tax.
Q- Is it mandatory to having a savings account in post office to encash the National Savings Certificate?
Ans. No, it is not mandatory to have an account in post office in order to encash NSC.
Q- Is it worth it to invest in both a PPF and NSC at the same time on a monthly basis?
Ans. Investments are always best.Investing in both is worth it .
Q- Can we take tax benefit on NSC every year?
Ans yes, you can take provided interest received shoudl be reinvested in NSC.
Q- Can I claim the maturity amount for a lost NSC certificate?
Ans. Yes, it can be claimed but you have to file a request for duplicate NSC for that.
Q- What bank does with NSC certificates submitted as mortgage for a loan?
Ans. It is kept as collateral security if borrowers fail to pay the amount so that it can be monetized at that time.
Q- CAN NSC interest BE SHOWN AS EXEMPT income under SEC 10(15) of IT ACT?
Ans. No, Interest on NSC is considered in income.
Q- Which one is a better saving option: NSC, recurring deposit or PPF?
Ans. All the above investments are safe investments. The investment with better interest ratio and withdrawal policy should be considered.
Q- If I buy national saving certificate which gives 7.6% return, when government changes rates of interest, will it also affect by already bought NCD or will it be only for new issues?
Ans. New interest rates is applicable for only on Fresh investment.
Q- Are the National Saving Certificates (NSCs) VIII & IX both tax free or not
Ans. Yes, the maturity amount on this is Tax Free.
Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.