Personal Finance

NSC: A safe, tax-efficient choice

Anand Kalyanaraman | Updated on November 18, 2018

National Savings Certificate also gives high effective returns on investments

If you haven’t exhausted your investment limit under Section 80C (₹1.5 lakh a year) and are looking for a no-risk, medium-term option, the fiver-year National Savings Certificate (NSC) offered by the post office is a good choice for many reasons.

One, the interest rate on the NSC after the recent hike is a neat 8 per cent per annum — higher than what most banks offer on their fixed deposits, including tax-saving five-year deposits. Each new investment in the NSC will earn the prevalent interest rate at opening (8 per cent during October-December 2018) until maturity.

Two, the NSC, like other instruments from the post office, carries zero risk — thanks to government guarantee. No fixed income options by banks or companies can boast this level of safety.

Three, the investment is open to all — there are no restrictions, unlike the Senior Citizens Savings Scheme (SCSS) that is available only to the elderly or the Sukanya Samriddhi Scheme that is open only to those with young daughters.

Four, you can invest any amount in the NSC — the minimum amount is ₹100, you can invest in multiples of ₹100, and there are no caps such as ₹1.5 lakh a year in the case of public provident fund (PPF) or ₹15 lakh in SCSS. But note that the deduction under Section 80C is restricted to ₹1.5 lakh a year across investments, including NSC.

Five, the money is invested for a reasonable time period — five years — and is not locked in for too long, like in the case of the 15-year PPF.

Six, being a cumulative instrument that compounds interest annually and does not pay it out, the NSC can help build a good corpus at the end of the five-year period. But this feature — no periodic payouts — can be a drawback for those seeking regular income. However, investors can get loans against NSC, if the need arises.

Tax breaks

Finally, the NSC can pack quite a punch when it comes to effective return on investment. That’s thanks to the Section 80C tax break available on the investment and also on the interest for the first four years that is reinvested. In effect, only the last year’s interest is taxable. Considering the tax break on both the investment and the interest, the post-tax effective annual return is 10.95-18.5 per cent for those in the 10-30 per cent tax slabs.

To claim the interest re-invested in the first four years under Section 80C, you must first declare it in the tax return and then claim the tax deduction. There is no tax deducted at source on the fifth year’s interest, but you must pay tax on it on your own.

If you have exhausted your Section 80C limit without the NSC investment, the effective annual return (pre-tax) on the NSC will be the coupon rate, that is, 8 per cent currently. And then, tax will apply on the interest.

In that case, you may be better off looking at other higher-yielding fixed income options such as high-rated company fixed deposits.

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Published on November 18, 2018
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