NSC – National Savings Certificate

Who Should Invest in NSC?

Anyone who is searching for a safe investment instrument can choose a National Savings Certificate. The investment avenue will help you earn a steady interest while saving taxes simultaneously. But since it is a fixed income scheme, you cannot expect inflating-beating returns from it. 

The National Savings Certificate is primarily promoted as a savings plan for individuals. Therefore, trusts and Hindu Undivided Families and trusts are not eligible to invest in them. Moreover, NRIs and private and public limited companies are also not allowed to invest in NSC. 

Some basic eligibility criteria for investing in NSC are as follows:

●    Individuals must be Indian citizens.
●    No age limit exists for purchasing a National Savings Certificate. 
●    But an adult needs to purchase an NSC on behalf of a minor.
●    NSC investments can also be made jointly with another individual. 
 

Advantages of NSC

Let’s browse through some of the major benefits of NSC.

●    Fixed interest rate: The National Savings Certificate scheme has a fixed annual interest, which is revised by the government every quarter. Currently, the interest rate on NSC is 6.8% per annum. Therefore, you can rely upon your NSC as a fixed source of income.

●    Maturity period: There were initially two types of certificates under the National Saving Certificate post office scheme. The two types included NSC VIII Issue with a 5 year tenure and NSC IX Issues with a 10 year tenure. In December 2015, the NSC IX Issue was discontinued. Since only NSC VIII is available for subscription, the maturity tenure for this investment scheme is 5 years.

●    Easy access: The National Savings Certificate is extremely easy to purchase from any post office after submitting the required KYC documents. You can also easily transfer an NSC from one individual to another or from one post office to another. The transfer won’t have any impact on the maturity or accrued interest of the original certificate.    

●    Flexibility of investment amount: Individuals can make investments according to their convenience in an NSC. The minimum limit on NSC investments is only Rs 100, and investors are restricted to any upper limit. 

●    Tax-saving benefits: The government-backed investment scheme also supports tax benefits. NSC is eligible for tax deductions of up to Rs 1.5 lakhs annually. 

●    Power of compounding: The interest earned on the NSC post office gets compounded annually. Even though it gets reinvested by default, you will be paid only at maturity. 

●    Premature withdrawal: Usually, you are unable to withdraw from a National Savings Certificate before maturity. But in case of the death of the investor or a court order, premature withdrawal is possible.  

●    Maturity corpus: The investor receives the entire investment corpus on maturity. Since there is no TDS, the subscriber needs to pay the applicable tax while filming their ITR or pay the tax in advance. 

●    Loan facility: NSC schemes are accepted as collateral or security for loans from banks and NBFCs. A transfer stamp is placed on the certificate and transferred to the bank while providing loans. 

●    Nomination facility: Investors are allowed to nominate a family member. The nominee is able to inherit the NSC in the event of the investor’s sudden demise. A minor can also become a nominee.
 

Documents Required to NSC

You will need the following documents to invest in the NSC scheme:

●    The National Savings Certificate application form

●    Proof of identities like passports, PAN cards, driving licenses, voter ID, or any government ID

●    Proof of residence like telephone bill, electricity bill, passport, bank statement

●    Photograph 
 

How to Invest in NSC through electronic mode?

During the initial days, physically pre-printed NSCs were issued by post offices or banks. But it has been discontinued since July 2016. In recent times, you can purchase a National Savings Certificate through the following modes:

●    E-mode
●    Passbook mode
 

Investing in NSC Through Electronic Mode

Individuals with a bank or post office account can invest in the NSC scheme electronically. An internet banking facility with your savings account is necessary to invest in the NSC. If you don’t maintain your savings account, reactivate it and opt for an internet banking facility. You will be able to easily hold the National Savings Certificate in electronic mode, just like e-recurring deposits or e-FD.
 

Investing Through Passbook Mode

If you are not comfortable with the online method, you can invest in the National Savings Certificate through passbook mode. Similar to a bank passbook, all transactions are printed in the NSC passbook. You can record the transactions manually or through electronic mode. 

The passbook will contain the physical signature of the authorized individuals. You can also replace the passbook mode with electronic mode. In that case, the pages in the passbook will be canceled. The passbook will also be collected by the officials and destroyed. 

The post office or bank branch will also collect your passbook receipts. In case you lose your physical NSC, you will receive a pre-printed NSC or a passbook. Your old National Savings Certificate number will be mentioned on the issued passbook.
 

Tax Benefits for NSC investment

NSC post office investments of up to Rs 1.5 lakh come with a tax rebate facility. The interest accrued on the certificates gets added back to the original investment. It ensures that subscribers are able to qualify for a tax break.

When you purchase NSC worth Rs 1000, you will be eligible for a tax rebate on the initial investment amount in the first year. In the second year, you will be able to claim a tax on the National Savings Certificate investment that year, along with interest earned in the first year. It happens because the interest gets added to the original investment and is compounded annually.  

NSC tax benefits can be accessed by businessmen and salaried individuals falling under income tax assessment. The interest earned from NSC can be shown under “income from other sources.” If you want to evaluate the taxable amount on your interest, you can use an NSC tax calculator. 
 

Premature Withdrawal and Maturity Period Under the NSC

Premature withdrawal under the NSC is permitted during the following instances:

●    When the certificate holder passes away
●    When the certificate gets forfeited but the pledgee needs to be a Gazetted Government Officer
●    When the court of law has declared that the invested amount can be withdrawn

Whether the withdrawal is taking place before or after the maturity period, you need to submit the following documents:

●    The original NSC document
●    The NSC encashment form
●    Identify proof like Voter ID, driving license, passport, or other.
●    Attestation of the guardian is mandatory if the NSC was purchased on a minor’s behalf.
●    When the certificate holder passes away, the nominee will be able to encash the invested amount by submitting the Annexure 1 and Annexure 2 forms.

If the amount is withdrawn within a year of investment, no interest will be paid out. A penalty fee is charged in case of early withdrawals. The maturity amount is paid out via check. 
 

Comparing NSC with Other Tax-Saving Investments

Before learning about the differences between the National Savings Certificate and other tax-saving instruments, let’s gather some details about these savings avenues. 

Public Provident Fund

The PPF is one of the most effective tax-saving instruments. It is a scheme sponsored by the government of India under section 80C of the constitution. PPF comes with a compulsory lock-in period of 15 years. It might have a negative impact on the liquidity requirements of the investor. 

The PPF interest rate on this tax-saving instrument is declared by the Indian government every quarter, and it remains fixed for a particular period. PPF works as a fixed return instrument due to its assured interest rate. In every financial year, a minimum of Rs 1.5 lakh can be invested in a PPF account through monthly investments or a lump sum amount. 

The entire amount invested in PPF can be exempted from taxes. The interest earned on the investment amount is also not included in tax calculations.

Fixed Deposits

Fixed deposits come with a lock-in maturity period of 5 years. According to section 80C, the investment scheme is eligible for tax exemptions. It is extremely popular among risk-averse individuals. It offers guaranteed returns at a fixed interest rate.

But premature withdrawals from fixed deposits nullify all tax benefits. Moreover, interest earned under this scheme is also taxable. 

Equity Linked Savings Scheme

The Equity linked savings scheme is also popular among investors with the primary goal of tax saving. Apart from tax benefits, the investment option is also associated with earning substantial returns through market advantage.

A minimum of 80% of the total portfolio on equity securities is invested in tax-saving ELSS funds. Therefore, these funds yield the highest returns among other similar instruments in the market. 
The scheme also has a mandatory lock-in period of three years. The tax reduction benefits according to the ELSS scheme are as follows:

●    Capital gains less than Rs 1 lakh are not charged with long-term capital gains tax.
●    The total principal amount invested in ELSS is exempted from tax as long as the amount is below Rs 1.5 lakh.

Tax-saving ELSS funds are relatively liquid when you compare them with similar security options. 
National Pension Scheme

The National Pension Scheme is a systematic investment policy attempting to offer financial security upon retirement. The tax-saving investment offers a claim deduction of up to Rs 1.5 lakh on the total principal amount. In the case of salaried individuals, both employees and employers can contribute to the National Pension Scheme. 

According to section 80CCD (1), employees can make a tax-free investment of up to 10% of their salary. Self-employed individuals can claim an NPS tax benefit of Rs 50,000 more according to Section 80CCD (1B). With the discretion of the investor, funds invested in an NPS account can be partially reinvested in equity schemes.