National Savings Certificate, also popularly known as NSC, is another savings instrument that qualifies for tax benefits under Section 80C. As is known under Section 80C of the Income Tax Act, deduction up to Rs 1,00,000 per annum is allowed if investments are made in the specified securities.
For a long time, in the 1980’s and early nineties, NSC was the most preferred mode of tax saving investment in the country as the interest paid was high and the maturity period, six years, was lower than PPF - the other popular option.
NSC is a long-term investment that is a pure debt instrument and provides fixed return to the investor. There are several peculiar features of the instrument that gives it a distinctive style and flavor and this also contributes to its popularity.
Low minimum requirement of money to invest, ease of purchase, simple procedure and reasonably high rate of interest are its plus points.
The NSC falls under the category of small savings and are available in the post offices across the country. One can go to the post office and buy these instruments in various denominations ranging from Rs 100 to Rs 10,000 depending on the requirements.
There are also small savings agents who provide service at your doorstep. The investment in these instruments will enable a deduction from the taxable income for the buyer subject to a maximum limit of Rs 1 lakh in a year.
The earnings on the instrument are at 8 per cent but the interest is compounded at half yearly intervals. This pushes up the overall rate of return or the yield on the instrument to 8.16 per cent. Every six months, the interest is accumulated but this is not paid out to the investor.
At the time of maturity of the instrument, the total amount of the capital plus the accumulated interest will be paid out. Since the life of the instrument is six years, the entire money will be available to the investor only at the end of this period. Premature withdrawals are not allowed.
Even though the investor does not receive any payment in cash every year, the amount of interest earned has to be considered as income for the purpose of taxation. There is no tax benefit for the interest earned and hence the entire amount would have tax to be paid on it.
At the same time since this is not received but is accumulated along with the original investment, it will be considered that the amount of interest is reinvested in the scheme and this figure will also be considered for the benefit of deduction under Section 80C.
An actual calculation shows that a sum of Rs 1,000 invested in a NSC will become Rs 1,601 after the end of six years at the time of maturity and the investor will receive this sum as a pay-out. In the interim period, every year the specific interest earned will have to be calculated as income. The figure of income will not be the total interest divided into six but will be a rising figure over the years because of the compounding effect that is coming into play.