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Context

• Prime Minister Narendra Modi filed his nomination for the Varanasi Lok Sabha seat, disclosing his investments.
• His largest investment is in fixed deposits at SBI, followed by the National Savings Certificate (NSC) scheme.

National Savings Certificate (NSC)

• Type: Government Savings Bond.
• Purpose: Ideal for small investments and tax savings.
• Introduction: Launched in the 1950s to support nation-building.
• Availability: Can be purchased by any Indian resident from any post office in India.
• Risk Level: Low-risk, government-backed.
• Return: Provides a fixed return.
• Target Investors: Suitable for risk-averse investors and those seeking stable, fixed returns.

How Does Investing in NSC Generate a Return?

Initial Investment and Fixed Return:

• Principal amount invested in NSC.
• Return earned at a fixed rate set by the government.

Interest Compounding:

• Interest is compounded annually.
• Higher returns compared to simple interest schemes (e.g., fixed deposits).
• Annual interest added to the principal for subsequent interest calculations.

Restricted Additional Investment:

• No additional investment in the same certificate after the initial investment.
• Additional investments can be made by purchasing new NSCs from any post office.

Fixed Interest Rate:

• Interest rate remains constant throughout the certificate's tenure.
• Rate is fixed at the time of purchase.

Tax Benefits:

• Interest earned eligible for tax exemption under section 80C.
• Tax savings on both the initial investment and the interest earned.

Example Calculation:

• Initial investment: 100.
• Interest rate: 8% per annum.
• Maturity period: 5 years.
• Maturity amount: Rs. 144.23.

Comparison with Other Schemes:

• NSC adds yearly interest to the principal, increasing the next year's interest base.
• Allows for tax exemptions on the return on investment.
• Other saving schemes might not offer tax exemption on the returns.

Key Points

• Compounded Interest: Provides higher returns due to annual compounding.
• Tax Efficiency: Offers tax benefits on both the initial investment and the interest earned.
• Fixed Returns: Ensures guaranteed returns with a fixed interest rate.
• No Additional Investment: Requires purchasing new certificates for further investments.
• Government-Backed Security: Reliable investment option backed by the government.

Who Can Invest in NSC?

Eligibility:

• Must be a resident of India.
• Age is not a restriction; minors can invest through a legal guardian.

Requirements for Minors:

• An adult must issue the certificate on behalf of the minor.
• The adult must be the legal guardian of the minor.

Documentation:

• Possess identity and residential proof.
• Acceptable documents: Aadhaar Card, PAN Card, Voter ID, driver's license, or other documents as required by the post office or bank.

Non-Resident Restrictions:

• Non-residents cannot invest in NSC.
• If a resident holding an NSC certificate becomes an NRI, they can hold the certificates until maturity.

Scheme Restrictions:

• Only individuals can invest in NSCs.
• Trusts and Hindu Undivided Families (HUFs) are not eligible.
• A karta of an HUF can invest in their own name, but not on behalf of the HUF.

Features and Benefits of National Savings Certificate (NSC):

• Competitive Interest Rate: NSC offers an attractive interest rate of up to 7.7%, surpassing many other investment avenues. The interest is compounded annually, enhancing returns over time.
• Government Backing: As a government-backed scheme, NSC ensures the safety of investments. The principal amount along with accrued interest is guaranteed by the Government of India.
• Promotion of Savings Culture: NSC aims to foster a culture of saving by offering an accessible investment option with a modest minimum investment requirement. Individuals can invest in multiples of Rs.100, fostering financial discipline.
• Tax Efficiency: Investments in NSC qualify for tax deductions under Section 80C of the Indian Income Tax Act, reducing taxable income and potentially lowering tax liabilities for investors.
• Compound Interest: The annual compounding of interest allows investors to earn returns on both the principal and accrued interest, facilitating accelerated growth of investments.
• Fixed Maturity Period: With a fixed maturity period of five years, NSC provides a clear investment timeline. At maturity, investors receive the principal amount along with compounded interest.
• Accessibility: NSC can be conveniently purchased from designated post offices nationwide, ensuring accessibility for individuals across urban and rural areas.
• Nomination Facility: NSC offers a nomination facility, enabling investors to designate beneficiaries who will receive the investment and interest in the event of the certificate holder's demise, ensuring seamless asset transfer and reducing complexities for nominees.
• Stability and Security: NSC is immune to market fluctuations due to its fixed interest rate, making it an ideal choice for risk-averse investors seeking stability and guaranteed returns.
• Premature Encashment: While NSC has a predetermined maturity period, it allows premature encashment under specific circumstances such as the certificate holder's demise, court orders, or forfeiture by a pledgee, offering flexibility to investors in times of need.

By incorporating these features and benefits, NSC emerges as a versatile investment instrument catering to the diverse needs and preferences of investors while ensuring financial security and growth potential.

NSC Tax Benefits:

• Tax Deduction under Section 80C: Investments made in National Savings Certificates (NSC) qualify for a tax deduction under Section 80C of the Indian Income Tax Act. As per current regulations, investors can claim a deduction of up to Rs. 1.5 lakh in a financial year, subject to any revisions in tax laws.
• Exemption at Maturity: Although the interest earned on NSC is not tax-free, it is treated as reinvested and qualifies for tax exemption under Section 80C. This implies that the interest income is not taxed annually but is liable to taxation only upon maturity or withdrawal.
• Tax Deferral Benefit: The interest accrued on NSC is not subject to annual taxation, offering a tax deferral advantage. Investors can defer the tax liability on interest until the maturity of the NSC, allowing for potential growth of the investment.
• Cumulative Tax Benefits: NSC tax benefits can be availed cumulatively with other eligible investments and expenses under Section 80C. This section encompasses various investments such as life insurance premiums, contributions to provident funds, tuition fees, and more. However, the aggregate deduction under Section 80C cannot exceed the specified limit.

It's important to note that NSC interest rates are compounded annually but the interest is payable only upon maturity. This means that investors can claim tax deductions each year on both the principal amount and the accrued interest, as the interest is reinvested annually, enhancing the cumulative tax-saving potential of NSC investments.

Taxability of NSC Withdrawal and Interest:

• Investment Limit and Tax Rebate: While there's no specified maximum limit for NSC investments, only investments up to Rs. 1.5 lakh annually qualify for a tax rebate under Section 80C of the Income Tax Act of 1961. Additionally, the interest earned on NSC is reinvested in the initial investment and is eligible for a tax break.
• Treatment of Interest: For the initial four years, the interest accrued on NSC is assumed to be reinvested, making it eligible for a tax credit within the overall annual limit of Rs. 1.5 lakh. However, the interest earned in the fifth year is not reinvested and is consequently taxed at the investor's applicable slab rate.
• Premature Withdrawal: Typically, premature withdrawal of investments in the National Savings Certificate is not permitted before maturity. However, special circumstances allowing early withdrawal include:
  • The sudden demise of the certificate holder.
  • Court-issued orders permitting withdrawal.
  • Forfeiture of the holder's certificate.

These conditions outline the tax implications of NSC investments, providing clarity on the treatment of interest and the circumstances under which premature withdrawal may be allowed.

Advantages of Investing in NSC:

• Tax Efficiency: The interest earned on NSC is virtually tax-exempt, except for the last year. Additionally, the invested amount qualifies for tax exemption under Section 80C of the Income Tax Act, offering potential tax savings.
• Flexible Investment: NSC allows investments starting from as low as Rs. 100, with no upper limit on the investment amount, providing flexibility to investors based on their financial capacity.
• Compounded Interest: The interest earned on NSC is compounded, leading to higher returns over time and enhancing the overall growth of investments.
• Investment on Behalf of Minors: NSC can be purchased on behalf of minors, facilitating long-term savings and investment planning for their future.
• Collateral for Loans: NSC can be utilized as collateral to secure loans from banks, providing liquidity and financial leverage to investors when needed.
• Government Backing: With government backing, NSC offers a low-risk investment option, providing assurance and stability to investors.
• Competitive Return Rate: NSC offers one of the highest return rates among fixed-rate investment options, ensuring attractive returns on investment.
• Accessibility: NSC certificates are easily accessible as they are available at all post offices, making it a convenient investment option for individuals across the country.
• Duplicate Certificate Facility: In case of loss or damage to the original certificate, a duplicate certificate can be arranged, safeguarding the investment and ensuring peace of mind for investors.

Disadvantages of NSC:

• Lack of Reinvestment Option: NSC does not offer a reinvestment option, necessitating the purchase of a new certificate each time an investor decides to reinvest, which may involve additional paperwork and processing time.
• Fixed Interest Rate: The interest rate offered by NSC is fixed, which may result in lower real returns if they fall below the inflation rate over time, impacting the purchasing power of the returns.
• Limited Availability of e-Mode: The proposed e-mode for purchasing NSC is not yet widely available at many post offices and national banks, potentially limiting access and convenience for some investors.

Conclusion

• In summary, the National Savings Certificate (NSC) is a secure, tax-efficient investment backed by the government, offering competitive returns and accessibility for investors.

PRACTICE QUESTION Q. Consider the following statements regarding the National Savings Certificate (NSC): 1.Age is not a restriction; minors can invest in National Savings Certificate (NSC) scheme. 2.Trusts and Hindu Undivided Families (HUFs) are not eligible to invest in it. 3.NSC interest rates are compounded annually but the interest is payable only upon maturity. 4.The interest earned on NSC is tax-exempt, except for the last year. Which of the statements given above is/are correct? A) 2 and 4 only B) 1 and 2 only C) 2, 3 and 4 only D) All Answer: D) All