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NSC, comparison with ELSS and its MF alternative

National Saving Certificate (NSC)

National Savings Certificate (NSC) is a tax saving investment with the aim to encourage small or medium savings backed by Central Government. 

The NSC scheme is available at all Post Offices and promoted by the Indian Government. Since the scheme is backed by the Indian Government, the risk is considered to be very low.

The scheme is applicable only to Indian citizens and not applicable for Non-Resident Indian (NRI) and a HUF. Due to the income tax benefits, low minimum investments requirement and low risk, the national pension scheme is gaining popularity.

NSC Eligibility

The eligibility criteria for an investor is listed below:

  1. The individual must be an Indian citizen
  2. An individual must not be a non-resident Indian citizen
  3. No age limit for an individual to invest in NSC
  4. An investor can purchase NSC from an Indian Post Office for a maturity period of 5 years
  5. The minimum investments must be Rs 100 and no maximum limit on the investment amount.
  6. It is issued in denominations of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000 and Rs. 10,000.   
  7. It is accepted by the majority of banks as collateral security against loans
  8. An investment can be made with another adult or on behalf of a minor
  9. HUFs and Trusts are not eligible to invest in the scheme under NSC VIII issue
  10. They are available for a maturity period of 5 years and 10 years

NSC Interest Rates

The NSC interest rates are regulated by the Government every quarter. The current NSC interest rate is 6.8% annually. The interest is compounded annually but paid at the maturity of the certificate. With the compounding of interest, the returns are automatically reinvested but still do not beat inflation.

Documents required for NSC

Below are the documents required to submit:

  1. NSC application form duly filled and signed
  2. A recent photograph
  3. An original identity proof such as Passport, Permanent Account Number (PAN), Voter ID, Driving license
  4. An original address proof such as Passport, utility bills, Bank statement, etc.

Transfer policy

NSC can be transferred from one post office to another. It can also be transferred to another individual. The certificate will be the same, the name of the old owner will be rounded and the name of the new owner will be mentioned.

Tax Implications

Principal Amount

The principal investment amount invested is allowed as a deduction under section 80C The deduction is limited up to Rs .15 lakh as per the Income Tax Act 1961

Interest Earned

The interest earned on the principal amount is treated as a re-invested in NSC. Hence it is allowed as a deduction under section 80C up to Rs 1.5 lakh as per the Income Tax Act 1961

The interest earned is first added to the total income of the investor and then allowed as a deduction. Hence, tax is also deducted on the interest earned.

How to withdraw NSCinvestments?

According to the withdrawal rules, the NSC investments cannot be withdrawn before the maturity period. The maturity period can 5 years or 10 years as the case may be. 

If the amount invested is withdrawn within a year, interest will not be paid. Plus, a penalty will be also be charged to the certificate holder

However, premature withdrawal is allowed in the following cases:

  1. The certificate holder passes away
  2. On the forfeiture of the certificate, only if the pledgee is a Gazetted Government Officer.
  3. The entire amount invested can be withdrawn if ordered by the court of law

The withdrawal rules require the filing of the following documents. The documents must be submitted by the certificate holder to withdraw:

  1. The original NSC certificate
  2. The NSC encashment form
  3. Proof of identity
  4. The attestation of the guardian if it was purchased on behalf of a minor
  5. In case the NSC certificate holder passes away, the nominee can withdraw the entire amount invested by submitting the Annexure 1 (registered at a Post Office) and the Annexure 2 for legal evidence.

Benefits of NSC scheme

Below are the benefits of investing in an NSC scheme:

  1. It carries a tax benefit of the principal amount invested as well as the interest earned. Both are tax-free. the principal amount carries a tax deduction u/s 80C of The Income Tax Act 1961.
  2. Except the interest earned in the final year of the investment, the entire interest earned is tax-free.
  3. The transfer is allowed from one individual to another, only once during the lock-in period.
  4. An investor is allowed to invest even after the maturity period.
  5. A duplicate certificate can be obtained in case the original certificate is lost.
  6. The interest earned is compounded annually and reinvested towards the scheme. 

Who should invest in NSC scheme?

An investor looking for the below can consider investing:

  • a fixed income at regular interval like monthly, quarterly basis or yearly
  • a guaranteed interest rate
  • low risk
  • save tax

The scheme has the above benefits along with a few disadvantages like lower interest rates and no inflation adjustment. Unlike tax saving mutual funds and National Pension System, it does not provide inflation bearing returns.

However, it totally depends on the financial goals of the investor. The government has made all the attempts to make the scheme accessible to the investors. It is available at all the post offices with an easy to go process of registration.

NSC vs other investment schemes

National Saving Certificate is one of the tax saving schemes with tax deduction u/s 80C of The Income Tax Act 1961. There are other schemes available as well. These schemes are Public Provident Fund (PPF), tax saver fixed deposit, ELSS funds and National Pension Scheme.

The following table provides a comprehensive comparison of NSC vs other tax benefit schemes

Tax Saver InvestmentLock-in PeriodRisk Interest Rate
Public Provident Fund15 yearsLow 7.10%
ELSS Funds3 yearsMarket-Related RiskDepends on market
Tax Saver Fixed Deposit5 yearsLow5% to 7%
National Pension Scheme – NPSTill the age of 60 yearsMarket-Related Risk8% to 10%Depends on market
NSC5 yearsLow6.8%

Conclusion

Now that we know all about the scheme, if you are looking for a fixed income, save tax with low risk, this is surely suitable. But there are other investment options as well that are tax saving options being inflation-adjusted as well. You can compare all the investment options and invest wisely.

Frequently Asked Questions

Can a HUF or a Trust invest in NSC?

An investment is not allowed to a HUF or a Trust in NSC under the rules of Issue VIII.

What is the maturity period of NSC Issue VIII?

The maturity period for NSC Issue VIII is 5 years and the NSC interest rate is 8.5% per annum.

What is the maturity period of NSC Issue IX?

The maturity period for NSC IX is 10 years and the NSC interest rate is 8.8% per annum.

Is the savings certificate interest rates different for NSC issue?

Yes, the savings certificate interest rates are different for NSC issue. For NSC issue VIII is 8.5% p.a. and NSC IX interest rate is 8.8% p.a.

Can a nomination in NSC be canceled or changed?

The nomination can be canceled or changed at any time by submitting the FORM-3 by paying a fee of Rs 5

Can I avail loans against NSC?

Yes, you can avail loans against NSC. NBFCs and Banks accept it as a collateral for a secured loan.  the postmaster should put a transfer stamp to the certificate and transfer it to the bank.

Published on February 10, 2020