When it comes to saving money, several investment options are available, each with its own set of benefits and drawbacks. And the Indian government has launched some savings schemes through the post office. One such investment option is the National Savings Certificate (NSC), a savings bond offered by the Government of India.
In this blog, let’s discuss what NSC is, how it works, and its benefits and drawbacks.
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What is the National Savings Certificate (NSC)?
National Savings Certificate is a savings bond issued by the Government of India, available to residents of India. It is a low-risk investment option that offers fixed returns.
NSC works similarly to traditional fixed deposits. This certificate has a fixed term of 5 years, and the interest is compounded annually but paid at the end of the tenure of 5 years.
The current interest rate of NSC is 7% p.a. and, like other post office savings schemes, the government updates the interest rate every quarter.
From a tax benefit point of view, your investment in this certificate is eligible for a tax deduction of up to ₹1.5 lakhs under section 80C. However, it is to be noted that interest earned is taxable.
But interest earned during the first 4 years on NSC is tax deductible under section 80C. How do you ask?
This is because the interest of NSC is re-invested for these 4 years. Remember, the invested amount and interest earned are only passed to you at maturity. In the 5th year, i.e. at maturity, the interest earned from NSC is subject to tax as per your slab rate under the head “Income from Other Sources”.
Also, NSC can be used as collateral for securing loans from banks.
How does a National Savings Certificate work?
Investing in NSC is relatively simple. You can invest in NSC from any post office across India or through public sector banks. You can also invest through 3 private banks – ICICI, HDFC, and Axis bank.
The minimum investment amount for NSC is ₹1,000, and there is no maximum limit on the investment amount.
Once you purchase NSC, you will receive a certificate with the investment amount, interest rate, and maturity date. The investment made in NSC will be locked in for 5 years.
How can you withdraw your investments from the NSC?
The invested amount and the interest earned both are paid to you only at maturity, which is at the end of 5 years.
And normally, premature withdrawal from the National Savings Certificate is not permitted. However, under special circumstances, it may be allowed. These include a court order or the demise of the actual investor.
Benefits of National Savings Certificate
- Guaranteed Returns – One of the most significant benefits of investing in NSC is that it provides guaranteed returns. The interest rate on NSC is fixed, and the interest is compounded annually.
- Tax Benefits – Investment made in NSC qualifies for a tax deduction of up to ₹1.5 lakhs under Section 80C of the Income Tax Act. Additionally, the interest earned on the NSC is taxable, but it is eligible for a tax deduction under Section 80C for the first 4 years. But remember, this ₹1.5 lakh limit of tax saving investment includes other options such as PPF, EPF, and ELSS Mutual Funds along with life insurance premium payments.
- Easy to Invest – Investing in NSC is relatively easy and convenient. The investment can be made at any post office across India, and the minimum investment amount is ₹1,000.
- No Maximum Investment Limit – There is no maximum limit on the investment in NSC, making it an attractive option for individuals who want to invest a large amount. Also, it is safer than FD.
Drawbacks of National Savings Certificate
- Fixed Lock-in Period – One of the significant drawbacks of investing in NSC is that it has a fixed lock-in period of 5 years. This means that you cannot withdraw the money before the maturity date.
- No Liquidity – Since you cannot access the money in case of an emergency or an unforeseen expense, NSC is not a liquid investment option. However, you can take a loan against NSC by using it as collateral with banks.
- Low Returns – NSC offers a fixed return rate, which may not keep up with the rate of inflation. This means that the actual return on investment may be low. Additionally, the returns on most FDs as of March 2023 are higher than 7%.
Should you invest in the National Savings Certificate?
We should always take investment decisions based on our goals, risk appetite, financial situation, etc.
After looking at the tenure, interest rate, tax benefits, etc. We can say NSC is a good savings scheme. But this is not an investment scheme.
Also, NSC is very illiquid. You can break your fixed deposits with a penalty, but you cannot withdraw from NSC that easily.
One thing that works for NSC when compared to fixed deposits is the tax benefits. But again, how many of your investments can you fit into the ₹1.5 lakh limit under section 80C?
Think carefully before investing in the National Savings Certificate. This can be particularly useful for individuals who want to save for long-term goals and are risk-averse.
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