All you Need to Know About the Tax Benefits of NSC
The National Saving Certificate (NSC) is a federal initiative by the National Saving Institute (www.nsiindia.gov.in), a department of the Ministry of Finance that is almost 130 years old. The Institute aims to inculcate the habit of saving among the masses to become a self-reliant society. The National Savings Certificate (NSC) is one of the many schemes notified by the central government. This is a low-risk, fixed-income product, just like PPFs and post office FDs. You can purchase it from the closest post office under your name or open a joint account with another adult or a minor. In this article, we will learn about the NSC tax benefits, its features, and more.
NSC Tax Benefits
A National Savings Certificate (NSC) is a tax-saving investment under Section 80C of the Income Tax Act of 1962. The NSC tax benefits make it a more lucrative investment channel for investors. Since there is no cap on the amount you can invest with NSC, you can utilise the entire 1.5 lakh tax shield permissible under Section 80C.
Anyone who does not have any other deductions under Section 80C, like home loan interest, ELSS mutual fund investments, LIC, etc., can explore NSC deductions under Section 80C with the proper guidance of their financial advisor.
Additionally, NSC tax benefits are:
Tax shield: As discussed earlier, you can utilise complete deductions under Section 80C and make NSC a tax-saving alternative.
NSC interest is taxable: Interest on NSC is taxable as and when accrued. One of the key features of NSC is that it repays your principal and interest after the account’s maturity. It implies that the interest generated for the year (accrued interest, as said in legal terms) will be taxable in that year itself.
For example, if you invest INR 1,00,000 in NSC during the first year at an interest rate of 6.8%. The investment will earn you INR 6,800 as interest in your NSC account. You will have to disclose this amount in your income tax returns and pay tax on it as per the applicable tax rate. So, even though the scheme will pay you interest + principal at the end of the 5th year, you will have to pay tax every year as per your income slabs.
Tax at slab rates: As the NSC interest is taxable, you will have to pay tax on the interest generated in that year at the tax slab applicable to you for that year.
As the tax on the national saving certificate is not fixed, it is also helpful for small income holders as they can pay a tax as per their income slabs. Basic income holders whose taxable income does not exceed the income tax threshold will not have to pay any tax on the income generated through NSC interest.
TDS on maturity: There will be no tax deduction at the time of maturity of the NSC investment, and principal and interest will be paid in full. It is one of the more prominent tax benefits of NSC.
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How to Calculate Tax on NSC?
Since NSC is floated to promote saving habits among people, it does not give a periodic interest payout, unlike other fixed interest-based financial instruments.
Thus, the full principal amount and interest compounded on an annual basis will be paid in the 5th year to the certificate holder. There are no interim payouts either for interest or on principal.
The question arises: if interest is going to be received in the 5th year, then should I be paying tax on the interest in the 5th year only? The answer to this question is that income tax is paid on an accrual basis, i.e., as and when the interest income is generated.
Let us understand the tax on national savings certificates through the example given below:
Consider investing INR 1,00,000 at 6.80%:
Even if you were liable to receive INR 1,38,949 at the end of year 5 (principal + compounded interest), you would be paying tax on the interest accrued each year as per the above table. (Please refer to Column f). The interest income first be added under the head “Income from Other Sources” and then you can claim deduction under section 80C and claim NSC tax benefits.
What are the Benefits of Investing in a National Savings Certificate?
The following are the benefits of investing in an NSC:
- Security: NSC is a sovereign-backed financial instrument that is considered to be one of the safest forms of investment with the lowest risk of default.
- Fixed returns: NSC comes with fixed stable returns depending on the interest rate, which are revised every quarter as notified in the official gazette.
- Collateral: Since NSC is considered to be the safest investment, it is also accepted by banks and other financial institutions as collateral security.
- Tax saving: Tax deduction under 80C is eligible up to INR 1.5 Lakhs per year.
- Investment Flexibility: Since the minimum investment size is INR 1,000 and multiples of 100, even the smallest of small savings can also be invested.
- No limits: There is no cap on investment in NSC, and any amount can be invested in the scheme.
- No brokerage/fees: Since the post office distributes them, there are no service fees/brokerage on purchasing these instruments.
Also Read: How to Update Nominee in EPF Online?
Final Thoughts on the National Savings Certificate
With features like safety, reliability, stable returns, and tax benefits, NSC can be part of an investment portfolio for individuals who do not have any other designated investments under section 80C of the Income Tax Act of 1961. It is often recommended to get proper advice regarding tax deductions and benefits from your registered financial consultant before making any investment decisions.
Frequently Asked Questions
Can I withdraw from the NSC before 5 years?
No. The NSC certificate is locked-in for 5 years. In normal circumstances, It cannot be withdrawn before the maturity of 5 years. In certain exceptional cases like death, order by a court of law, forfeiture by pledging premature redemption is permitted.
What happens if I don’t claim it after 5 years?
If an individual does not claim the redemption after maturity, the post office running rate with simple interest will be payable on the balance amount.
Can I take advantage of section 80C every year?
To take advantage of the investment every year, additional investments have to be made. The same investment is not eligible for the exemption each year. Interest accrued on investment in the previous year can be considered during the 80C calculation.
Is FD better than NSC?
NSC and FD both have their advantages and limitations. Additionally, NSCs offer lower risks and higher interest rates than fixed deposits. This is because TDS is deducted from interest earned on FDs. Although FDs provide a marginally higher interest rate, due to the deduction of TDS, the post-tax returns may be less. Thus, when comparing these two tax-saving instruments, one should not just compare interest rates but also interest yields on maturity on FDs and NSCs.
How many NSCs can I buy?
There is no restriction on buying many NSCs during a financial year. NSC can be invested for a minimum of ₹1,000 in multiples of ₹100.