Understanding NSC- National Savings Certificates

Investors should choose their investment instruments as per their specific financial goals. As an investor, you can either earn high returns by taking high risks or choose to invest in fixed return schemes that offer better risk-adjusted returns. Many such fixed income schemes offered by the government also allow you to claim income tax deduction under Section 80(C) of the Income Tax Act. National Savings Certificates (NSC) is one such scheme that promises you guaranteed returns along with decent income tax benefits.

What is NSC?

NSCs are savings bonds issued by India Post that offer a certain fixed interest rate to the investor. The government revises the interest rate on NSCs quarterly. At present, the rate of interest on NSCs is 6.8% per annum, compounded annually. NSCs are an easy investment option for low to medium earners and can be booked at any post office branch across the country. The investors can withdraw the principal amount invested along with the applicable interest only post maturity of the certificate. Premature withdrawals are possible, but only under certain rare circumstances.

Features of National Savings Certificates

Eligibility: Any Indian citizen who is not an NRI can invest in NSCs. Hindu Undivided families and trusts are not eligible to invest in NSCs. There is no age limit for investing in NSCs- you can purchase them even on behalf of minors (a minor above the age of 10 years can invest in NSC in their own name). Apart from being issued to single investors, they can also be issued to up to three adults jointly. 

Minimum Investment: A minimum investment of Rs. 1,000 is required to invest in NSCs. You are allowed to invest only in multiples of 100. There is no upper ceiling on the amount that can be invested in NSCs.

Maturity: NSCs mature in five years. If you don’t withdraw the amount at maturity, you earn an interest rate equivalent to that applicable for the Post Office Savings Scheme for the next two years. However, after two years of maturity of an NSC, you do not earn any interest on the invested amount.

Rate of Interest: The current interest rate for National Savings Certificates is 6.8% per annum, compounded annually but payable at maturity. The Ministry of Finance revises the interest rate every three months.

Nominee: The investor can nominate any family member (even minors) to inherit the certificate on their demise.

Types: Before December 2015, NSC VIII and NSC IX were available for investment. Now only NSC VIII is available, and NSC IX stands discontinued. 

Taxation:  You can claim a deduction of up to Rs. 1.5 lakhs from your net taxable income under Section 80(C) of the Income Tax Act if you invest in NSCs. Notably, this deduction benefit is also applicable to the amount earned as interest in the preceding year.

For example, if you invest Rs. 1,000 in NSC, you can claim a deduction of Rs. 1,000 this year. Since the interest earned on this Rs. 1,000 is reinvested next year, you will also be eligible to claim a deduction next year, equivalent to the interest earned on the amount invested this year.

Premature Withdrawal: You can not withdraw the amount invested in an NSC before maturity, except in the following rare circumstances:

1. Death of an account holder 
2. On the order of a court of law
3. The pledgee is a Gazetted government officer, and the certificate is forfeited.

Benefits of National Savings Certificates

Risk-free: Since it is a government-backed scheme, there are guaranteed returns on the investment with near zero risk of default.

Reinvestment of interest: The interest income is reinvested and annually compounded. Therefore, the corpus you receive at maturity is significantly large.

Accessibility: NSCs are available at all post offices across the country; you can buy them after furnishing the necessary documents.

Loans: You can use NSCs as collateral to avail loans from banks and NBFCs. You can get a loan of up to 80% – 85% of the amount invested in NSCs. The tenure of this loan is the same as the remaining tenure of the NSC. You need to submit the following documents to the bank where you want to apply for the loan:

• A valid ID proof
• A valid proof of income
• Recent Passport size photographs
• Original NSC

Tax benefits of NSC: One major reason why one might prefer to invest in NSCs over other post office savings schemes like KVP (Kisan Vikas Patra) is that NSCs offer income tax benefits. You can claim a deduction equivalent to the amount invested in NSCs (up to Rs. 1.5 lakhs) from your net taxable income for the year under Section 80(C) of the Income Tax Act.

Also Read: All you Need to Know About the Tax Benefits of NSC

NSCs vs Other Tax-Saving instruments

NSCs are not the only investment instruments with tax benefits. Many other investment instruments also offer decent returns and good tax-saving benefits. Here is a quick comparison between the various tax-saving investment schemes:

Who Should Invest in NSC?

Different investors have different risk appetites and financial goals. Those looking to secure their capital with a steady return can invest in National Savings Certificates. Individuals who can invest small amounts can easily buy NSCs at any post office branch; they do not need much documentation or know-how. Also, those who want to diversify their portfolio to include tax-saving instruments can invest in NSCs. 

However, as can be seen in the table above, an NSC cannot offer very high returns like other market-linked instruments. Furthermore, the constraint of a fixed lock-in period can limit those looking for investment plans for the near short term. Also, only individual Indian resident citizens can buy these instruments; thus, legal entities like trusts and HUFs cannot invest in them.

How to invest in NSC? 

You can invest in NSCs through both online and offline modes: 

Online mode

If you have a bank or a post office savings account where the KYC is complete, you can invest in NSC through the internet banking facility. The NSC can be held in e-NSC format, just like an e-FD.

Passbook mode

You can also invest in NSCs offline. Before obtaining the NSC, you must submit the following documents to the post office.

1. A duly filled NSC application form
2. Recent passport size photograph
3. A valid proof of identity – passport, Voter ID, Senior Citizen ID, driving licence, Permanent Account Number (PAN) Card or any other Government ID
4. A valid Proof of address like passport, telephone bill or electricity bill

Once the NSC is issued, the transactions’ details are noted in the passbook. In case you lose your NSC, you can get a passbook instead of a reprinted NSC containing the details of the lost certificate.

Closing Thoughts

If you are looking for an instrument through which you can conveniently save small amounts of money with guaranteed risk-free returns, National Savings Certificates can be the right investment instrument for you (also, do consider other fixed-return instruments like PPF, KVP, SSY etc.). They come with additional tax benefits and also work as collateral to avail a loan from a bank. Availability at all post office branches across the country makes NSCs a highly accessible instrument of investment that can be used to develop a habit of saving.

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