NSC an attractive investment tool with attractive returns

1. What is National Savings Certificate?

Promoted by the Government of India and accessible via post offices, these popular fixed income securities are aimed towards inculcating the habit of savings and investment among the people of the country.

Simply put, National Savings Certificate or NSC is an attractive investment tool with good interest rates, a safe investment with low risk, and tax benefits.

It can encourage investors to save small amounts and invest them regularly to get reasonable returns on their investment and tax benefits under section 80C of the Income Tax Act.

2. How NSC Works

NSC is fundamentally very simple in nature. An investor can visit his/her nearest post office and deposit the amount of money which he/she wants to invest. The said amount shall be treated as an investment.

The investment amount can be made as desired by the investor, however, it should adhere to the denomination allowed and designated by the government.

The investor is entitled to a yearly interest. These certificates usually have a maturity of 5-10 years from the date of allotment.

It must be noted that no interest shall be paid to the investor till the date of maturity. The interest accrued till the maturity date shall be reinvested.

3. Who Can Invest in NSC?

The government promotes this scheme as a savings and investment scheme for individuals. Therefore, Hindu Undivided Family’s (HUFs) and trusts cannot invest in NSC. Even Non-Resident Indians cannot invest in NSC.

In a particular case, wherein a person was a resident of India at the time of investing in the NSC, and he/she subsequently became an NRI during or before the maturity period, as per the provisions allowed in this scheme, the person shall be allowed to the claim the interest and tax benefits accruing from investing in this investment option.

Thus, only Indian Individual citizens can invest in NSC.

Those individuals who are looking for a fixed income investment with tax benefits may invest in NSC.

4. NSC Interest Rates

The NSC interest rate is 7.6% (as of Jan 1, 2018).

This goes to show that the interest rate from NSC is almost at par with the interest rates offered by other fixed income investment options such as PPF, Tax saving Fixed Deposits, among others.

5. NSE Tax Benefits

Interest received from NSC is liable to tax under the head ‘Other Income’.

This tax will be subject to the income tax slabs applicable to an individual.

As per the NSC VIII issue (1989) rules, interest accrued on an NSC investment shall not attract any TDS (Tax deducted at source).

Now, the interesting part here is that the amount of interest accrued from investment in an NSC is not paid to the investor but reinvested in the NSC.

Note the interest is reinvested in NSC, which is a specified tax deductible instrument under section 80C of the Income Tax Act.

Simply put, the investor shall have to show the interest earned on NSC deposits as income and subsequently as a deduction under section 80C.

However, it is important to note that the total deduction allowed to an individual under section 80C is Rs.1, 50,000 only.

6. Types of NSC Certificates

Two types of NSC also referred to as ‘Issues’ are available for investment to an individual at a post office. These 2 types are-

I.          NSC Issue VIII

NSC Issue VIII has a maturity period of 5 years.

The interest rate offered by this type of NSC is slightly lower than the rate offered by NSC IX.

This type of NSC issue aims to provide an investment option for those people who look for ways to invest in safe instruments while simultaneously availing tax benefits at the same time.

These issues come with a denomination of ₹100 to ₹10,000.

II.          NSC Issue IX

The distinguishing feature of this issue is that it comes with a maturity period of 10 years.

The interest rate offered under this issue of NSC is slightly higher than the one offered by NSC VIII.

This issue also comes with a denomination ranging from ₹100 to ₹10,000.

7. Minimum Investment in NSC and Maximum Investment in NSC

The minimum amount of investment allowed in a National Savings Certificate is ₹100.

However, there is no limit to the maximum amount that can be deposited in an NSC.

A person can invest any amount exceeding Rs.100, as per his choice; however, the amount must be according to the denominations specified.

8. NSC: Types of Holding

There are various modes under which these NSC certificates can be held. The following modes are given below:

I.          Single Holder Type Certificate

This type of certificate, as the name suggests, can be held by only by a single person. Such certificates are only issued to individuals and joint holders are prohibited.

Appointment of nominees is allowed, however, the individual on whose name the certificate is issued has to make the decisions.

Certificates can only be issued to an adult.

II.          Joint ‘A’ Type Certificate

Joint A type certificates are those certificates that are issued to 2 adults. On maturity, the amount is payable to both the adults who are joint certificate holders.

The signature of both the holders is required in case the certificate needs to be transferred or cancelled, or a nominee needs to be changed.

III.          Joint ‘B’ Type Certificate

The difference between Joint A and Joint B type certificate is that Joint B type pays the maturity value to any one of the 2 joint certificate holders. This is opposed to maturity payment to both the certificate holders in case of Joint A type holding, as mentioned above.

All the other features are same in A and B type joint certificate. Both can be operated and held by 2 adult joint certificate holders.

9. NSC Withdrawal

One of the distinguishing features of NSC is that it has a pre-determined lock-in period. Thus, any investment in NSC cannot be allowed to be withdrawn before the maturity date.

However, an investor in a savings certificate can withdraw his investments before the maturity period, only in the following specified circumstances-

1. On the death of the holder of the certificate or the holders in case of joint holders
2. On order of the court to do so

• On forfeiture by a pledgee. The pledgee has to be an authorized Gazetted Government officer and forfeiture should conform to the rules.

It is also important to note that, if a pre-mature withdrawal is done within 1 year from the date of issue of the certificate, then the encashment will be done only at the face value. No interest shall be allowed to the investor before a period of 1 year.

If a pre-mature withdrawal is made after 1 year from the date of issue of the certificate, then the investor shall be eligible to receive interest. But the encashment of the certificate shall be made at a discount.

10. Interest on NSC Post maturity

There can be a case when a certificate has reached its maturity date and still not redeemed by the investor.

In such a case, the interest is allowed to such investor only up to a specified period of 2 years after the date of maturity.

Readers must note that the interest would be provided at the rate of interest of a savings account. Investors shall not receive interest at the usual NSC interest rate.

Moreover, the interest for 2 years on such non-withdrawal post maturity shall be on a simple interest basis.

11. Payment for Purchase of NSC

NSC can be purchased from a Post Office. Select banks and online portals are also allowing for the purchase of NSC certificates.

The payment for the purchase of a certificate can be made via any of the following modes allowed-

1. Cash
2. Cheque, Demand Draft or pay order drawn in favour of the Postmaster

Generally, the savings certificate is issued on the spot (instantaneously) by the Postmaster.

Otherwise, a provisional receipt is issued to the investor. Later, this provisional receipt can be exchanged by the investor with the NSC.

Furthermore, an NSC can be transferred from one Post Office branch to another. This can be done by making an application via the prescribed form from any of the post offices involved in such a transfer.

12. NSC Reinvestment of Interest

The interest that is earned through NSC is reinvested in the scheme every year. This re-invested interest amount, otherwise taxable under the head ‘Other Income’, attracts tax benefits under Section 80C.

Since the interest earned for the last year i.e. the year of maturity cannot be reinvested and is therefore paid back to the investor, it is taxable in that year.

13. Documents Required for NSC

The following documents are required while purchasing a new National Savings Certificate.

1. The application form- Form 1. This form declares the amount of investment and nominees
2. Supporting documents that are usually required, advisable to keep handy are Proof of identity and Proof of address.

14. NSC Forms

3 forms required for issuance and maintenance of National Savings Certificate are:

• Form 1: Application form

An application form is the first step/ form in purchasing a NSC.

The first page in this 2 paged form contains information pertaining to the purchase.

It contains personal details, including the name of the investor along with the total amount of investment. The form also collects information about nominations, if any.

• Form 2: Nomination form

This is the form that allows the nomination of a beneficiary, in case one was not appointed when the certificates were purchased by the investor. If the nominee is a minor, the investor can even inform the post office about the adult who will be responsible for the minor.

• Form 3: Change of nomination form

The third form or Form 3 is the one that is used to cancel an existing nomination. The form collects information about the new nominees along with the information pertaining to the certificates for which the nomination is being changed.

15. How to Transfer NSC?

Two types of transfers are permitted in case of NSC investments.

First being, transferring the certificates from one post office to another. While the second involves transferring the ownership from one person to another.

·        How to Transfer NSC to Another Post Office

To transfer NSC from one post office to another, the holder of the certificate is required to submit an application to either the old, or the new post office requesting the transfer.

Such an application is required to be signed by all the holders of the certificates, in case they are of Join A or Joint B type.

·        How to Transfer NSC to Another Person

Upon the request of the investor, the certificates held under his/her name can be transferred to another person.

A written consent is required from the postmaster of the post office where the NSC is held.

Such transfers can be made from:

• The original holder to their nominee, if the holder has died.
• The original holder to a court or any other person as per the direction of the court.
• For the joint holding type certificates, transfer from one of the holders to another.

Things to Be Kept in Mind During Such Transfers Are:

• The person to whom the certificates are being transferred shall receive the certificates only after a minimum of 1 year has passed since the date on which the certificates were bought.
• The application for any such transfers is required to be made through appropriate forms.
• Forms are required to be signed by all the holders of the certificate.
• For certificates that are held in the name of a minor, any transfer is possible only if the guardian can prove that the proposed transfer is in the best interest of the child and that the child is alive and well.

16. Benefits of NSC

NSC is a unique tax-saving investment vehicle, with a long lock-in period. There are a couple of other tax-saving investment options with lower or no lock-in periods also providing higher returns.

NSC has its own set of advantages and can be useful for many investors. Some of the benefits are:

1. There is no upper limit on the maximum amount that can be invested in these certificates. Provided that the specified denominations are adhered to.
2. One can visit the nearest Post Office to invest in an NSC. As post offices are present even in small districts and villages, a vast majority of the Indian population can be a part of this investment option.

• The certificates can also be issued on behalf of a minor child, to plan for the child’s future or as the case may be.

1. Investments made in NSC are eligible for deduction under section 80C of the Income Tax Act. Thus investors can enjoy tax benefits on their investments in NSC.
2. The interest received from investment in these certificates is allowed as a deduction and are thus virtually tax-free, except in the year of maturity.
3. These certificates come with a lock-in period of either 5 or 10 years. This promotes the concept of investment for a long-term to gain from the power of compounding.

• The certificates can be reinvested post maturity.
• The investment, depending on the amount, can be used to avail secure loans.

 

17. Loans Against NSC

One of the unique benefits of NSC is that it can be used to avail a secured loan if one wishes to do so. The following are important points that an investor of NSC who is looking to avail secured loans must keep in mind-

• In order to secure a loan against NSC, the certificates is required to be transferred to the bank that is providing the loan.
• Moreover, the above-mentioned pledge can alternatively be made to the President of India or the Governor of the state where the investor resides as well.
• After the process of this transfer is complete, the entity to which the certificate is transferred will be considered the new holder of the certificate.
• The said new entity shall continue to be the holder of the certificate till the time those certificates are re-transferred to the original holder.

Any investment decision, be it in NSC or an ELSS, or any other investment alternative for that matter, should be carefully taken after understanding the underlying risk and returns.

Each person may have a unique objective depending upon his/her unique requirements.

The investment horizon of the investor, along with the liquidity preference related to the investment should be carefully assessed.

National Savings Certificate are unique investment options, encouraged by the Government, to inculcate a habit of savings and investment among the common people.

They come with fixed returns and tax benefits on investment as well as interest. Since the lock-in period of 5/10 years means funds cannot be withdrawn prematurely, investors should factor this as well.