NSC CERTIFICATE or National Saving Certificate

Let me take some time out and share my knowledge and information on National Saving Certificate. I remember my dad investing in NSC during my growing up years. Of late white collar urban middle class seems to have lost interest in this investment tool, largely owing to extravagant marketing of Mutual funds [Equity, Non Equity] , Direct equity , Bank FD and other Debt options.

Investment limit

NSCs do not have a limit of how much one can invest. What's more, interest up to Rs 1 lakh is tax-free. You read that correctly. NSCs offer you the possibility of earning up to Rs 1 lakh fully tax-free.

This is because NSC is the only small saving scheme wherein not only the initial deposit, but also the interest for the first five years, out of its term of six years, is eligible for a deduction under section 80C.

Interest and returns

NSC offers 8% interest compounded half-yearly. Due the compounding, the effective rate per annum works out to 8.16%. It is a cumulative scheme with a term of six years, meaning, though the interest accrues every year, it is paid to the investor together with the initial capital invested at the end of six years. For example, Rs 10,000 invested in NSC today will grow to Rs 16,010 at the end of six years.

Tax treatment

Let’s talk about the tax treatment of the interest paid out . Unlike PPF, where the full amount of interest is tax-free, NSC interest is taxable. However, as it is a cumulative scheme (eg interest is not paid to the investor but instead accumulates in the account), each year's interest for the first 5 years is considered reinvested in the NSC. Since it is deemed reinvested, it qualifies for a fresh deduction under Sec 80C, thereby making it tax-free. Only the final year's interest, when the NSC matures, does not receive a tax deduction as it does not get reinvested, but is paid back to the investor along with the interest of the earlier years and the capital amount.

Illustration

Example: You invest Rs 1,00,000 in an NSC on April 1, 2010. Interest on this investment for each year is shown in the following table:

April 1, 2010 Initial investment 100,000
Mar 31, 2011 interest for Yr 1:   8,160
Mar 31, 2012 interest for Yr 2:   8,830
Mar 31, 2013 interest for Yr 3:   9,550
Mar 31, 2014 interest for Yr 4:   10,330
Mar 31, 2015 interest for Yr 5:   11,170
Mar 31, 2016 interest for Yr 6:   12,070
Total interest 60,110
Total value of investment:   1,60,110

Important detail:

From the above discussion, it is shown that both NSC and PPF interest is tax-free. However, the difference is that PPF interest is tax-free per se, whereas the NSC interest becomes tax-free on account of the deemed reinvestment under Sec 80C. Remember that Section 80C has a limit of Rs 1 lakh. Your NSC interest would only qualify for the deduction provided you have funds left in Sec 80C.

Comparion with Fixed Deposit:

NSC is a better investment than Fixed Deposit. Lets say the above 100 K was invested in a Fixed Deposit for 5 years. Ler ROI be 10%. Then in 6 years you would have earned 60000 unlike 60110 above. But your entire 60000 rupees can be taxed. In NSC only the last year’s interest of 12070 would be taxed.

Where and how to buy?

National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at most post offices in the country in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. NSCs can also be transferred from one person to another by paying a small fee. They can also be transferred from one post office to another.

See url’s:

http://www.bajajcapital.com/gss/nsc.html

http://www.investmentyogi.com/planning/national-savings-certificates-nsc.aspx