About National Savings Certificates
When it comes to the matter of savings, there are a lot of options that have been made available to investors in India. These options offer a range of features that can include things like attractive interest rate, safety for the money invested, income tax benefits and also the chance to increase the amount invested and that too by a substantial amount. These products are designed to meet the needs of various needs of investors, which can be a combination of some of the features mentioned above.
One such combination of attractive interest rate, safe investment avenue and tax benefits are the National Savings Certificates or NSC. These are investment tools that can help investors get returns on the money invested and also get benefits in their taxable incomes. The inception of the NSC can be traced back to the 1950s when the government issued savings certificates in order to raise money to help fund the development of a new and independent India. They are issued by the post office and can be taken from any branch of the Indian postal service.
How NSC Works
When it comes to investing in NSC here is what you need to know about how the whole scheme works. How the whole thing works is, you buy an NSC worth a specific amount which is considered your investment. The purchase of the certificates will be done to the tune chosen by you but in denominations designated by the government.
This means that if you choose to investcertificates is set to 5 or 10 years from the date of purchase but the interest is calculated on a yearly basis. This interest will not be paid to the certificate holder till such time as the investment matures. The interest that is earned is also be reinvested in the NSC itself.
While NSC is an investment that almost every tax paying Indian can put money in, there are some who are not allowed to invest in these schemes.
- Since the scheme is aimed at residents of the country, those not residing in India are not eligible to invest in NSC.
- Under Issue VIII of NSC Trusts and Hindu Unified Families are also not eligible to invest in NSCs.
NSC Interest Rates Calculation
The NSC interest rates differs for each of the issues, since there are two types. The interest rates for NSC Issue VIII is 8.5% per annum while that for NSC Issue IX it is 8.8% per annum. The interest is calculated annually but paid out only at the time of maturity. The scheme also offers the option to reinvest the interest earned into the NSC.
According to the VIII issue (1989) NSC rules, the interest accrued in the NSC will not attract TDS (Tax deducted at source). Saving instruments like bank FDs attract a 10% TDS deduction if the interest earned in a financial year is more than Rs.10,000 in a financial year. If an FD and NSC are invested in with the same principal amount, the NSC will provide a higher maturity amount at the end of the maturity period. Plus, no TDS will be deducted during the five years, so there is no hassle of filing income tax returns. Hence, NSC is proved to have an edge over FDs.
To understand this reinvestment business, let’s take the example of an investment of Rs. 10,000 in NSC Issue IX. Being part of Issue IX, the maturity period will be 10 years and the NSC interest rate will be 8.8% per annum (as of Jan 2016). In the first year you will earn Rs. 880 as interest and you will declare Rs. 10,000 as investments in NSC under section 80C. In the second year the Rs. 880 that you earned will be added to the original investment bringing the invested amount to Rs. 10,880 which will earn interest at 8.8% for the next year.
At this point, if you don’t purchase any more certificates then you will declare the interest earned as income from other sources while computing your tax for year 2. At the same time you will also declare that amount as investment in NSC under 80C in NSC, which means the two shall cancel each other out and your interest will be tax free. Let’s assume that in the 3rd year you purchase additional certificates worth Rs. 20,000 so while filing your taxes, you will declare the interest earned from the previous amount as income and investment and you will also declare Rs. 20,000 as investment in NSC.
It is only in the last year that any income tax will be payable since the interest that you earn in the year will not be reinvested in NSC but will be paid out to you. In this case, you will declare the interest earned in the last year as income from other sources and that will be it. Since there is no TDS with NSC, you will be paid the entire maturity value of the certificates and the payment of applicable taxes will be your responsibility.
Below is the timetable for change in interest rates for all Post Office Savings Schemes.
|S.No||Quater for which rate of interest would be effective||When it will be noticed||Rate of interest to be based on FIMMDA month end G-sec. rate pertraining to|
|1||April -June||15th March||Dec-Jan-Feb|
|2||July - September||15th June||Mar-Apr-May|
|3||October - December||15th September||Jun-Jul-Aug|
|4||January - March||15th December||Sep-Oct-Nov|
Now as per the schedule, Government announced the interest rate applicable to all Post Office Savings Schemes from 1st April 2017 to 30th June 2017.
|Instruments||Interest Rate 2015-16||Interest Rate (Q1 & Q2) 2016-17||Interest Rate (Q3 & Q4) 2016-17||Interest Rate (Q1 of 2017-18)|
|5 Year National Savings Certificate (NSC)||8.5||8.1||8||7.9|
Types of NSC
There are two types of NSC Certificates that are available at the post office. While the two types, referred to as Issues, share the same general properties, there are some subtle differences between the two.
NSC Issue VIII
With NSC Issue VIII, the aim was to provide an investment avenue for those people who were looking for a way to invest in safe instruments and avail tax benefits at the same time. The certificates issued under this version are available to everyone except an HUF and a trust. These certificates come in denominations ranging from Rs. 100 to Rs. 10,000 but have an interest rate that is slightly lower than the once offered for Issue IX. Another key feature of these certificates is that they come with a maturity period of 5 years.
NSC Issue IX
The Issue IX certificates also come in denominations ranging from Rs. 100 to Rs. 10,000 and comes with an interest that is slightly higher than that which is offered for Issue VIII. These certificates come with a maturity period that can be as long as 10 years. As is the case with Issue VIII, these certificates also comes with no limit on the amount that can be invested in them but there is a limit on the minimum investment, which is Rs. 100.
Modes of NSC
Apart from the two versions that are available under NSC, there are also different modes under which these certificates can be held. These are:
Single Holder Type certificate
As the name suggests, such a certificate is issued to an individual and can be held only by one person. He or she can, of course, appoint nominees for the certificates but they will be the only ones taking decisions about them. This certificate can be provided for an adult or to an adult on behalf of a minor.
Joint ‘A’ Type Certificate
The Join ‘A’ Type certificate is one which is issue to two adult holders and is payable to both when the certificates mature. It can be operates by either of the holders and both the holders signature will be needed in case it is to be transferred or canceled, or even if the nomination needs to be changed.
Joint ‘B’ Type Certificate
This certificate is the same as the A type joint certificate in that, it too can be issued to two adults who can hold and operate the certificates. The only way that it differs from the previous certificates is in the payment of the maturity value. Unlike the A type joint certificate, this one pays the maturity value to any one of the two holders.
Features of National Savings Certificates
While there are a lot of features that the NSC shares with other savings schemes, there are some that are typical to the NSC. Some of the features can also differ
- These certificates can be taken by an individual and held as individual investments or taken and held as a joint investment.
- While there is a limit on who can invest in an NSC, there is no limit on the amount that a person can invest in an NSC.
- Since these products are meant for individuals, groups of people like companies, trusts, or Hindu Unified Families, cannot invest in them.
- There is a possibility where an individual can take NSC on behalf of a minor.
- The minimum amount that a person can invest in an NSC is Rs. 100.
- There are also specific denominations in which these certificates can be taken and these are Rs. 100, Rs. 1,000, Rs. 5,000 and Rs. 10,000 under NSC Issue IX.
- Investments cannot be withdrawn prematurely unless the case involves the death of the primary holders.
- Nomination facilities are also provided under both Issue VIII and Issue IX.
- The certificates can only be encashed at the post office where they were issued however, if the holder can provide sufficient evidence that he is entitle to the proceeds then they can be encashed as any post office.
Benefits of NSC
If handled right, investments in NSC can afford a person the following benefits:
- The interest can be virtually tax free except for the interest that is earned in the last year.
- There is no upper limit on the amount that can be invested in these certificates.
- If the certificates are lost or damaged, duplicates can be arranged for.
- Investments made in an NSC come under 80C of the IT ACT and afford the investor tax benefits.
- The interest earned is compounded and reinvested in the scheme by default which means that without purchasing extra certificates, you can increase the invested amount.
- When certificates mature, they can be reinvested in the scheme again by purchasing certificates of a value equal to the maturity value of the old ones.
- The certificates can also be taken on behalf of a minor.
- The investment can be used to secure loans.
Reinvestment of NSC
The interest that is earned through NSC is taxable under the slab ‘Income from other sources’. The interest that is earned each year in the scheme is reinvested every year. The amount that is re-invested each year attracts tax benefits under Section 80C. Since the NSC maturity period is five years, the interest can be re-invested only for four years. The interest earned in the fifth year is paid to the investor with the maturity amount. So, the tax benefit can be availed only for the first four years of the investment period. The interest earned in the final year is taxable.
HUFs Investment in NSC
The NSC has been designed to help individuals save their income. HUFs and trusts cannot invest under this scheme. The same goes for NRIs as well. Only individual Indian citizens can invest in NSC. The certificate can be purchased in the name of a minor or can be jointly held by two individuals but not by a HUF.
Taxation of NSC
There are two ways to look at NSC investments when it comes to the matter of computing taxes. The first is the tax benefit on the investment and the second, the tax payable on the returns.
- Tax benefits on investment
As is the case with a lot of investment avenues in the country, investments made in NSC are also eligible for income tax benefits. The benefit can be claimed under Section 80C of the IT Act. The limit for the claims is Rs. 1.5 lakhs in a single financial year. When it is said that the tax benefits can be up to a maximum on Rs. 1.5 lakhs then it does not mean that you will be able to invest Rs. 1.5 lakhs in NSC and in other things covered by 80C and still claim tax benefits. This basically means that the sum total of your investments under 80C cannot exceed Rs. 1.5 lakhs for tax benefits.
Let’s take an example. Let us suppose you have invested Rs. 3 lakhs in an NSC Issue VIII. In such a case you will only be able to claim tax benefits on Rs. 1.5 lakhs provided you have not invested anything else like life insurance or tax saving mutual funds (also covered under 80C). This means that under 80C, your taxable income can be brought down by Rs. 1.5 lakhs thanks to the NSC.
- Tax payable on returns
The other side of the taxation of NSC is the tax that can be due on the returns. When it comes to other investments, like a fixed deposit, the tax that is due to be paid on the returns earned is deducted at source by the banks. With NSC, no tax is deducted at source and it is the responsibility of the certificate holder to declare the income so that appropriate income tax can be calculated and charged.
One thing that needs to be know when it comes to the tax is that the interest earned throughout the tenure of the NSC is not taxable. How this works is that the interest earned each year is added to the invested amount as a fresh investment. This means that the interest earned is now eligible for tax deductions under section 80C. Only when it comes to the interest that is earned in the last year does income tax actually come into play since the last years interest is not invested in the NSC, but paid to the hold along with the maturity value of the entire investment.
Document Required to Purchase NSC
The documents required when purchasing a fresh set of National Savings Certificates will be:
- The application form for the investment. This is called Form 1 and allows you to declare the investment amount and the nominees.
Other supporting document may also be asked for and these could include:
- Proof of identity
- Proof of address
How to Buy NSC
Buying an NSC certificate is an incredibly simple process however it is NOT one which can be followed online. A National Savings Certificate can be bought from any post office and will require the submission of certain documents. Here is how you can get yourself some NSC certificates:
Step 1: Fill up the NSC application form that will collect some basic information about you and how much you want to invest.
Step 2: Submit any supporting document that might be needed.
Step 3: Nominate a beneficiary for the investment.
Step 4: Make the payment for the amount you want to invest. This payment can be made in cash or via cheques or even via a demand draft.
Step 5: Collect the certificates from the post office. It must be noted that if the payment has been made via a cheque then the certificate will only be issue upon realization of the payment made. In other cases the certificates will be issue immediately.
Step 6: Check the certificates for clerical or mathematical errors. If there are any mistakes you can get them corrected.
There are three NSC Forms that are central to the issuance and maintenance of an investment. These forms are:
Form 1: Application form
This is the application form that is the first thing that is needed when it comes to purchasing NSC. There are two pages in this form and the first page is the one that you need to be concerned with. It is on this page that information pertaining to your intended purchase will be collected. It will take down details of the amount that you wish to invest along with the details of the person in whose name the certificates need to be purchased, including minors. The form will also collect information about nominations and at the bottom will be a place where you and a witness, in case of a nominee, will sign the form. It also has the acknowledgment for the receipt of certificates at the bottom of page 1. Page 2 of this form is meant for official use and you won’t have to worry about it.
Form 2: Nomination form
This is the form that can be used to nominate a beneficiary in case one was not appointed when the certificates were purchased. This form allows you to declare the name, the date of birth and address of the person being nominated. In case the nominee is a minor, you can even inform the post office about the adult who will be responsible for the minor. Once these details are entered, you will have to enter the details of the certificates to which this nomination pertains. The last bit of this form is the part where you can sign the form and if the person making the change is illiterate, then the witnesses who sign the form will have to be someone who is known to the post office.
Form 3: Change of nomination form
The third form, also known as Form 3, is the one that can be used in case you wish to cancel the existing nomination. The form will collect information about the new nominees and after that, the information pertaining to the certificates for which the nomination is being changed. This form too will require the signature of a witness and will have to be submitted only at the post office at which the NSC was purchased.
Nominating a Beneficiary for NSC
Even though it is not mandatory, it is best to nominate someone to receive the benefits of your investment in the event of your death. If the certificates are held under the joint holding scheme and one of the holders passes away, the investment can still be operated by the other holder but in case all the holders pass away, the nominee will get the value of the NSC. Here are some other things that need to be kept in mind about nominations for NSC.
- Nominations can be made when the certificates are being purchased using Form 1.
- They can also be made after the certificates are purchased using Form 2.
- If the nomination needs to be changed you will need to use Form 3.
- If the holder is illiterate they will attest the forms with a thumb impression and the witness will have to be people known to the post office.
- A minor can be nominated as a beneficiary but in such cases an adult will also have to be mention as it will be this person to whom the benefits will be paid on behalf of the minor.
- Nominations and changes to nominations can only be made through the post office where the certificates were originally purchased.
- In case a holder passes away without having made any nomination, the amount held in the NSC will be paid to the legal heirs of the holder.
- If the denomination of the certificates is less than Rs. 500 then only one person can be nominated for each certificate.
- If a certificate has been bought on behalf of a minor then nominations are not permitted.
- If the nomination is being changed on certificates that were purchased on different dates, the nomination forms will have to be separate for each certificate.
- The change in nomination will take affect the day it is registered at the post office and not before.
The NSC comes with a maturity period of five years. The interest accrued each year is not provided to the investor but is reinvested. The amount at the end of each year is compounded annually. At the end of five years, the investor will receive the total maturity amount along with the interest. The interest earned only in the final year of the period is taxable. Since there is no TDS, the investor has to pay the tax.
The NSC investment comes with a lock-in period that is equal to the maturity of the certificates. They can only be withdrawn before the maturity date if:
- The holder of the NSC passes away.
- The holder of the certificate has forfeit them through a pledge.
- A court of law has ordered that the NSC be paid prematurely.
When it comes to the amount that you will get from closing an NSC prematurely the conditions are:
- If less than a year has passed since the certificate was purchased then only the invested amount will be returned and not interest will be paid.
- If the period that has elapsed since the certificates were bought is between 1 year and 3 years then the interest payable will be simple interest.
There are two types of NSC Transfers. The first one is transferring the certificates from one post office to another and the second is transferring the ownership from one person to another.
Transfer from one post office to another
Such a transfer may become necessary if the holder is moving from place to another and will not be able to journey to the post office in order to administer the NSC investments. In order to do this the holder of the certificate will need to submit an application to the old, or the new, post office requesting the transfer. The application will have to be signed by all the holders of the certificates if they are of Join A or Joint B type certificates.
Transfer from one person to another
If the holder chose, then he or she can have the certificates held under their name, transferred to another person. To be able to do this, written consent will be needed from the postmaster of the post office where the certificates are held. Such transfers can be made from:
- The original holder to their nominee if the holder has died.
- They can also be transferred from the original holder to a court or any other person as directed by a court.
- If the certificates are of the joint holding type then they can be transferred from one of the holders to another.
Some other things that will need to kept in mind with such transfers are that:
- The person to whom the certificates are being transferred will receive them only after a minimum of 1 year has passed since the date on which the certificates were bought.
- The application for such transfers will have to be made using the appropriate forms and is signed by all the holders of the certificate.
- If the certificates being transferred are held in the name of a minor then the guardian can transfer them only if he or she can prove that the proposed transfer is in the best interest of the child and that the child is alive and well.
Duplicate NSC Certificates
It is an unfortunate situation but there can be an instance where the certificates that you got, as a result of an investment in NSC, which were destroyed or lost. If you ever hope to encash them, you are going to need duplicates and to get them you will have to know the following:
- If you have lost your certificates, or if they have been rendered useless as a result of defacing or destruction or even theft, you can apply to the post office that you got the certificates from.
- If your post office is otherwise inaccessible, you can submit the application for duplicate certificates at any post office and they will forward it to the appropriate one.
- When you submit the application, make sure that you mention details such as the number of the certificates, the dates on which they were purchased and the amounts for which they were purchased.
- You will also have to ensure that you mention the reason for the request for duplicate certificates.
- If the value of the lost certificates is more than Rs. 500 then an indemnity bond will be required that will have either approved securities to back it or a guarantee from a bank.
- If the certificate being replaced is submitted as proof of destruction or defacing of the original then no indemnity bonds or securities will be required. This will, however, depend on the discernibility of the authenticity of the destroyed certificates.
- Once a duplicate certificate is issued, it will be redeemable only at the post office where it was issued.
Loan Against NSC
An NSC investment can be used to secure a loan that you might wish to take. In such cases here is what you can expect when pledging an NSC investment to secure a loan:
- For the purpose of securing the loan, the certificates will have to be transferred to the bank that is providing the loan.
- Such a pledge can also be made to the president of India or the governor of the state where you reside. It can also be pledged to a government company or a corporation or a local authority.
- When the certificates are pledged, the postmaster overseeing the process will make a note on the certificate that will say “Transferred as security to”.
- Once the transfer is complete, the entity to whom it is given will be considered the new holder of the certificate.
- The entity will continue to be the holder of the certificate till such time as the certificates are re-transferred to the original holder.
- In case the current certificates run out of space to make notifications of transfers, the postmaster can issue a new certificate which will be held in the same regard as the one which it is replacing.
Fee & Charges
When it comes to the fees and charges associated with the issuance of a National Savings Certificates, the amount charged is Rs. 5 and is payable in the following scenarios:
- When the certificates are transferred from one person to another person or an entity.
- When the postmaster issues a certificate of discharge upon encashment of certificates.
- When a holder requests for duplicate certificates.
- When the denomination of the certificate is changed.
- When the nomination is made AFTER the certificates have been purchased.
- When the nomination is changed.
1. Is there a denomination smaller than Rs. 100?
No. there is no denomination less than Rs. 100. This means that all your investments HAVE to be in multiples of 100.
2. Is the benefit for NSC under 80C Rs. 1 lakh or Rs. 1.5 lakhs?
The benefits provided under section 80C will be to the tune of Rs. 1.5 lakhs. The confusion comes in when you look at the limit for 80C prior to 2014. The limit was changed to Rs. 1.5 lakhs from 201-15 and will continue to be subject to change as per the government’s rulings.
3. Is there a lock in period with investment in NSC?
Yes there is a lock-in period which is equal to the maturity period of the certificates. They can be redeemed early but only under specific conditions.
4. Can a nomination be canceled or changed?
Yes, a nomination can be canceled or changed at any time using Form 3 and by paying a nominal fee of Rs. 5.
5. What is the maturity period and interest rate for NSC Issue VIII?
With effect from 01-04-2013 the maturity period for NSC Issue VIII is 5 years and the interest rate being offered is 8.5% per annum.
6. What is the maturity period and interest rate for NSC Issue IX?
As of 01-04-2013 the maturity period for Issue IX of NSC is 10 years and the interest rate on offer is 8.8% per annum.
7. What is the minimum limit for investing in NSC?
The minimum investment possible in NSC is Rs. 100.
8. Will tax on NSC Interest earned be deducted at source?
No, there is no TDS on the interest earned on investments in NSC. The tax payable is only calculated on the interest earned in the last year and it is up to the holder of the certificate to declare the income and pay the taxes.
9. Which part of the IT Act does NSC come under?
Investments made in NSC Issue VIII and Issue IX come under the purview of section 80C of the IT Act.
10. Can I take a loan based on my NSC investments?
Yes. NSC investments can be provided as collateral to banks, and other government organisations, in order to secure any loans.
11. Can a trust or an HUF invest in NSC?
Under the rules of Issue VIII of NSC, trusts and HUFs cannot invest in NSC.
12. Who can take a single holder type certificate?
Such a certificate can be purchased by an adult for themselves or on behalf of a minor.
13. I am an Indian but not a resident of the country, can I invest in NSC?
No, non-resident Indians cannot invest in National savings certificates.
14. Can I taken an NSC certificate under a joint holding option?
If you are not a trust or the Karta of an HUF taking an NSC on their behalf, then yes you can take an NSC under the joint holding option.
15. What are the main features of NSC Issue VIII?
The main feature of NSC Issue VIII are that it has no limit on the maximum investment possible. It also comes with an interest rate of 8.5% per annum and no TDS. The investment can be used to secure loans and get tax benefits up to Rs. 1.5 lakhs under Section 80C of the IT Act. It has a maturity period of 5 years, not available to trusts and HUFs, and comes in the minimum denomination of Rs. 100.
16. What are the main features of NSC Issue IX?
The main features of NSC Issue IX are that it comes in denominations of Rs. 100, Rs. 500, Rs. 1,000, Rs. 5,000 and Rs. 10,000. There is no maximum investment limit and the interest rate offered is 8.8% per annum. The maturity period for these certificates is 10 years and is subject to the same rules as Issue VIII.
17. Can armed forces personnel invest in NSC?
Yes, personnel of the armed forces can invest in NSC. In their case, should they pass away or desert, the postmaster can be directed by the forces to pay the nominee or the legal heir the entire amount that was due under the investment.
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