National Savings Certificates (NSC)
Introduction
This article explores the features of National Savings Certificates (NSC). NSCs as an investment instrument are good for people who want to invest a lumpsum amount for a fixed period of time for a specific financial goal. This goal can be accumulating funds for children's education or children's marriage. NSC is a fixed interest bearing investment instrument.
Opening of Account
Investment in NSC can be made through the Department of Post. National Savings Certificates can be purchased from any post office throughout India. NSCs are normally issued in the form of physical paper certificates. From some post offices NSC can also be purchased in demat form also.
Minimum and Maximum Investment Amount
The minimum amount required to be invested in NSC is Rs 100. NSC Certificates can be bought in various denominations of Rs 100, Rs 500, Rs 1000, Rs 5000, Rs 10,000 and other denominations as specified by the Government from time to time.
There is no upper maximum limit on the amount that can be invested in NSC.
Safety
NSC Certificates are issued by the Department of Post, which has the backing of the Government of India. Since the investment in NSC comes with sovereign guarantee, it is one of the safest instruments to invest in. The investor can be assured that his principal and interest will be repaid on maturity. So investment in NSC is virtually risk free.
Interest Rate
NSC's pay 8% interest compounded half yearly. The effective annual interest rate comes to 8.16%. So an investment of Rs 100 made in NSC amounts to Rs 160.10 at maturity at the rate of 8%.
The interest is calculated every 6 months and added to the principal amount. The entire amount is paid on maturity after 6 years.
If Rs 1000 is invested in a National Savings Certificate, interest is calculated in the following way
| Year | Interest |
| 1 | Rs 81.60 |
| 2 | Rs 88.30 |
| 3 | Rs 95.50 |
| 4 | Rs 103.30 |
| 5 | Rs 111.70 |
| 6 | Rs 120.80 |
| Total | Rs 601.2 |
Tax Treatment
Investment made in NSC qualifies for deduction from taxable income under Section 80C of the Income Tax Account. Although there is no upper investment limit on NSC, only investment of upto Rs 1,00,000 in a financial year qualifies for tax deduction under Section 80C.
The annual interest is deemed as fresh investment which is re-invested back in NSC and hence qualifies for tax deduction under Section 80C. The interest for the first 5 years is eligible for tax deduction. On maturity the interest is taxable as per the tax rates and the income slab of the investor.
There is no Tax Deducted at Source (TDS) on NSC.
Investment in NSC is exempt from wealth tax.
Tenure
The tenure of NSC investment is for 6 years.
The certificates can be encashed prematurely but there is an interest penalty for such premature encashments.
Nomination
NSC comes with nomination facility. In case of untimely death, nomination makes sure that the money is passed on to the nominee.
Transfer of Certificates
National Savings Certificates can be transferred from one Post Office to another Post Office.
National Savings Certificates can also be transferred from one person to another person.
In case the certificate is stolen, destroyed or mutilated then a duplicate certificate can be issued.
Other Features
NSC can also be bought in joint names.
NSC can also be bought in the name of a minor
Companies, trusts, Societies etc cannot buy NSCs.
Non Resident Indians (NRI) cannot buy NSCs.
On maturity if the certificates are not redeemed, then interest at the rate of normal Post Office Savings Account is paid for a maximum period of 2 years.
On maturity the person can reinvest the maturity proceeds again.
National Savings Certificates can be pledged with Banks and other Financial Institutions for loans against these certificates.
Comparison between Public Provident Fund and National Saving Certificate
| Public Provident Fund | National Savings Certificate |
| The tenure of PPF is 15 Years. On maturity the account can be extended for a block of 5 years at a time. | The tenure of NSC is 6 years. On maturity the option of renewal / reinvestment is available. |
| A person has to deposit a minimum of Rs 500 every year to keep the account active. | A person can start with a minimum deposit of Rs 100 without having to make yearly contributions. |
| The maximum investment that can be made in a financial year is Rs 70,000 | There is no limit on the maximum investment that can be made in NSC. |
| The interest rate paid is 8% with yearly compounding. | The interest rate paid is 8% with half yearly compounding. The effective annual rate comes to 8.16%. |
| Annual investments qualify for income tax deduction under Section 80C. The interest paid on maturity is tax free in the hands of the investor. PPF comes under Exempt-Exempt-Exempt (EEE) category. | At the time of investment the amount qualifies for income tax deduction under Section 80C. The interest paid on maturity is taxable. NSC comes under Exempt-Exempt-Tax (EET) category. |
| Partial withdrawals can be made from PPF from the 7th year onwards. | There is no facility for partial withdrawals from NSC. |
| In case of PPF joint accounts are not allowed. | In case of NSC the certificates can be purchased in joint names. |
| It is a good long term investment product which can be used for wealth creation or for retirement planning. | It is a good medium term investment product which can be used for specific goals like accumulating funds for children's education and children's marriage. |
Conclusion
NSC is one of the oldest and traditional investment product used by people for tax savings and at the same time earn good returns with lowest risk. This investment product can be used for making lump sum investments for specific goals like accumulating funds for children's education and children's marriage.
