Saturday , June 23 2018

National Savings Certificate (NSC)

National Savings Certificate (NSC)

Investment options in India have proliferated over years, catering to various needs of different types of investors. Different people have different financial goals and hence, a single product cannot satisfy everyone’s need. This explains the sheer number of investment products floating in market.

However, cannot deny that as of today, financial companies come up with new products and pitch them in such a fashion that people start believing that they need it. That’s a different story altogether. We are not worried about that.

National Savings Certificate (NSC)

Good thing however is that there are certain investment products which do not only genuinely cater to the needs of people but actually started off to build the nation which was left broken by the British colonial rulers.

We know that PPF was one such investment product. However, there was yet another – the NSC or National Savings Certificate which was brought to life during the 1950s. The purpose of this investment instrument was to create a pool of funds that can be used to rebuild the raped and pillaged nation. The National Savings Certificate, like many other investment products combines a number of benefits, which work towards the fulfillment of different financial goals of different people.

One of the shortcomings of NSC is that its availability is limited to only post offices. No other organization can issue this certificate. So, if you are to get hold of it, the only way of doing so is to visit a post office.

Modus Operandi of National Savings Certificate

NSC or National Savings Certificate is nothing but a certificate. You purchase a certificate. These certificates come in different denominations but these denominations have been defined by the government. However, you are free to choose the amount of money you want to invest. For example, let us say that there is a certificate whose denomination is INR 10,000. You want to invest, say INR 100,000. You can then purchases 10 certificates with each certificate of denomination INR 10,000.

When you make a purchase, the money you spend goes directly to government account. All you get is a certificate. This certificate is the proof that you have invested in NSC. Now, the government will use your money and invest in market and earn profits. A part of that profit is given back to you. However, the interest you earn cannot be withdrawn. It goes back into your NSC account, which is maintained by the government. The certificate you purchase will have a maturity period of either 5 years or 10 years. After the NSC certificate matures, you will be given back the original investment amount plus all the interest you have earned during this maturity period. This interest is calculated on a yearly basis. So, you keep earning interests annually.

A numerical example to explain how NSC investments work:

There are different types of NSC certificate and their maturity periods vary. We will come to this later. However, for the time being, let us consider a certificate which is known as Issue IX. You select the denomination to be INR 10,000 and purchase only one certificate. Issue IX certificates have a maturity period of 10 years. So basically, by purchasing an NSC Issue IX, you are investing INR 10,000 for a period of 10 years.

The annual interest this investment will earn is, say, 8.8% each year. So, after the first year of investment, you will earn INR 880 in interest. Now, as we said that the interest you earn is not paid out to the investor but is rather reinvested, what will happen is that the interest you earn will get added to your original investment amount. So, now your investment amount will stand at INR 10,880. For the next year, interest earning will be calculated on this INR 10,880 and not on your original investment.

This will mean that you will earn interest of INR 957.44 next year. This will keep happening till 9th year. On 10th year, the interest you earn will only get added to your actual amount and there will be no further interest earning as the NSC will mature. The whole calculation is shown in the table below.

Assumptions: Interest remains fixed at 8.8% for 10 years and you invest on INR 10,000, that is, there are no further investments.
Year of investment Original amount / amount after growth Interest rate Actual interest earned
Year 1 INR 10,000 8.8% INR 880
Year 2 INR 10,880 8.8% INR 957.44
Year 3 INR 11,837.44 8.8% INR 1041.70
Year 4 INR 12,879.14 8.8% INR 1133.40
Year 5 INR 14,012.54 8.8% INR 1233.10
Year 6 INR 15,245.64 8.8% INR 1341.62
Year 7 INR 16,587.26 8.8% INR 1459.70
Year 8 INR 18,046.96 8.8% INR 1588.10
Year 9 INR 19,635.06 8.8% INR 1727.88
Year 10 INR 21,362.94 8.8% INR 1879.94
Maturity is paid out INR 23,242.88 NA NA

So, after 10 years are completed, the total amount of INR 23,242.88 will be paid out to you. So, your investment actually grew by more than double in 10 years’ time. But the actual scenario will be slightly different because the interest rate applicable each year may vary. In fact, as of now, NSC interest rate is market linked and reviewed every quarter. So, the interest may actually change every quarter. This will change the total earning as well. The original investment amount may not increase to double the amount. In fact, NSC make no such commitment.

Variants / Types of NSC

It is time that we take a look at different types of National Savings Certificates available. There are only two types actually. They are more or less similar in nature. The differences are very subtle. Let us take a quick look at these two types in a tabular format for easy understanding:

Feature NSC Issue VIII NSC Issue IX
Denominations INR 100 to INR 10,000 (in multiples of 10) INR 100 to INR 10,000 (in multiples of 10)
Maturity Period 5 Years 10 Years
Investment Limit No Limit No Limit
Minimum Investment Allowed INR 100 INR 100
Interest Rate Flexible but slightly lower than Issue IX Flexible but slightly higher than Issue VIII
Available to Anyone Indian barring Hindu Undivided Families and Trusts Anyone Indian

National Savings Certificate Holding Types

While there are only two variants of NSC, there are actually multiple formats of holding. Let us take a look at those formats:

Single Holding Certificates

One and only one person is allowed to hold a certificate issued under this format. However, nominee allocation is allowed. Though there can be nominees, on the person holding the certificate is allowed to make decisions about the certificate. The certificate can be held by a person who is 18 year or above in age or it can be held by an adult in name of a minor.

Joint Holding A Type

This format allows two adults to jointly hold a certificate. However, it is mandatory that both adults put their signatures while making any decisions about the certificate or even appointing nominees. Signature by just 1 joint holder will not work. Both holders will be allowed to operate the certificate account. Maturity value will be paid out to both the holders.

Joint Holding B Type

This format allows two adults to jointly hold a certificate. As before (as in case of A Type), signature of both holders will be required for any decision or nomination. Both adult holders will be allowed to operate the certificate account. However, when it comes to paying out the maturity value, only and only one holder will be entitled to get the amount. Who gets the amount will have to be determined while purchasing the certificate.

Who Is Eligible to Buy NSC?

When it comes to purchasing NSC, there are certain restrictions that are to be kept in mind. There are the conditions:

  • A person has to be an Indian. Foreigners and NRIs are not allowed.
  • In case of NSC Issue VIII, Hindu Undivided Families and Trusts are barred from purchasing the certificate. They are however allowed to purchase Issue IX.

A Quick Look at Features of NSC

NSC has some nice features. Let us take a quick look at the features of NSC using bullet points:

  • It allows tax savings (we will come to this later).
  • It ensures safety of investment because it is issued by Government of India.
  • It is investor-friendly because of low minimum investment requirement. It is only INR 100.
  • There is absolutely no limit to the amount of investment that can be made.
  • There are 4 different denominations available – INR 100, INR 1000, INR 5000 and INR 10000.
  • Investors are allowed to appoint nominees for both variants of NSC.
  • There is no TDS on maturity value.
  • NSC can be purchased on name of a minor.
  • NSC can be encashed from the same post office from where it was purchased or from a different post office provided ample proofs are given that the person trying to encash it has the authority to do so.
  • Premature withdrawals are not an option unless the owner of the certificate dies.

What Are The Benefits of NSC?

There are several interesting benefits of NSC. In this section we are going to explore those benefits and learn about them. Ready?

  • The interest earnings on NSC can become tax-free until the second last year of maturity. In the last year however, normal taxes will be applied.
  • Since there is no outer limit to investment, investors can invest as much money as they want.
  • Duplicate certificates will be issued if the original certificates get damaged accidentally or they get lost.
  • Investments made in NSC fall under section 80C of the Income Tax Act prevailing in India. This means, investments made in NSC can be tax-free as long as the outer limit defined by 80C is maintained.
  • Interest earnings are reinvested and the growth is compounded. This means that the original investment can grow rapidly.
  • One can reinvest maturity amount for purchasing new certificates. The entire maturity amount can be reinvested or only the amount equivalent to the previous investment amount can be invested.
  • Investments are allowed on behalf of minors and hence, allow financial security for minors.
  • Investors can take out loans against NSC because NSC can work as a collateral.

What Interest to Expect for NSC Investments?

Until the time the Government of India decided to make interest rates linked to market, the interest rates for NSC were 8.8% for Issue IX types and 8.5% for Issue VIII types. This interest used to change every year. However, later the government decided to link interest to market and slashed the interest rates. However, the government also declared that interest rates will be revised every quarter. This means that currently interest rates on NSC are flexible and can change every quarter.

What Are the Taxation Rules Under NSC Investments?

This is something very important right? It is your hard earned money and you will not really want to give away a major portion of it in tax. So, investing in tax-savings schemes is one of the best ways to save some tax. When it comes to NSC, taxation can be looked upon in two ways: Taxation on the actual investment amount and taxation on the money withdrawn during maturity. Let us take up each case individually.

Taxation on the actual investments

We said earlier that NSC falls under the 80C section of Income Tax Act. This means that the money you invest in NSC will not be counted towards your income and hence, will not be taxed.

However…

80C also says that maximum investment amount (from all sources) that will not be counted as income in a single year in INR 1.5 lakhs. What does that mean?

Let us find out…

Scenario 1: You decide to buy NSC worth INR 1.5 lakh in 2016 and you make no other investments anywhere else.

Scenario 2: You decide to buy NSC worth INR 1.5 lakh in a year and invest another INR 1.5 lakh in PPF in 2016

Scenario 3: You decide to buy NSC worth INR 5 lakhs in a year and invest another INR 2 lakhs in, say a tax-saving mutual fund scheme.

In all the above scenarios, how much money won’t be counted as income and hence, not taxed? Let us find out in the table below:

Investment Scenario in 2016 Investment Type Investment Amount Total Investment Maximum Investment U/S 80C that will not be taxed Taxable Investment Amount
Scenario 1 NSC investment INR 1.5 lakhs INR. 1.5 lakhs INR. 1.5 lakhs INR 0
Other investment INR 0
Scenario 2 NSC investment INR 1.5 lakhs INR 3 lakhs INR. 1.5 lakhs INR 1.5 lakhs
Other investment INR 1.5 lakhs
Scenario 3 NSC investment INR 5 lakhs INR 7 lakhs INR. 1.5 lakhs INR 5.5 lakhs
Other investment INR 2 lakhs

Well, the table above shows you the amount of investment that will be counted as income and hence taxed and the amount that will not be counted as income and hence, not taxed. Now, be wise and choose the investment amount wisely.

Taxation on the withdrawn amount on maturity

What will happen when your NSC certificate matures? You will be paid the investment amount all interest earned (which was counted with compounded growth). Since it comes to you, it will become you income. This is when you will have to pay taxes as per income tax slab.

One interesting thing is that when NSC payouts are given, no TDS is applied. For other investments like Fixed Deposits, TDS is deducted and then the remaining amount is paid out to the investor. For NSC this is not the case. The investor will be liable for declaring the income properly and pay all taxes applicable.

What about the interest earnings over the maturity period?

Interest earnings over the maturity period are to be shown as income from other sources and hence, liable to taxes. However, this liability is canceled out because you also show the compounded growth in actual investment amount as repeated investment in NSC. Since it becomes an investment, the interest earning is not taxed as per 80C rule. However, there are three things that one needs to remember:

  • If the original investment is 1.5 lakhs of rupees or above, the interest earnings will become taxable.
  • The moment the added interest makes the total investment exceed INR 1.5 lakhs, interests become taxable.
  • The interest remains tax-free till the 9th year or 4th year (that is maturity period minus 1) because in the final year, it is not reinvested and is paid out to the investor.

How to Buy NSC?

There are 6 steps that you need to follow. These six steps are mentioned below:

  1. Go and collect the investment form.
  2. Fill in the nominee details in the form.
  3. Fill up the form and submit it along with required documents.
  4. Pay the investment amount using cash or demand draft or a cheque.
  5. Collect the NSC from post office. If you are paying via cheque, you have to wait until the cheque is enchased by post office. It is only then that the certificate(s) will be handed over.
  6. Run a thorough check on the certificates. If you spot any errors (like mathematical or clerical), as for rectifications.

That’s all!

What Documents You Need to Provide?

First thing first, you need to provide a duly filled application form. The details are to be accurate. This application form goes by the name Form 1. Once you fill the form and submit it, you will have to provide the following documents:

  • A proof of your identity like passport, aadhar card, voter id etc.
  • A proof of your address. A passport, voter id, utility bill etc. will work.

What Are the Different Types of Forms Related to NSC?

There are just 3 forms related to NSC. These are Forms 1, 2 and 3. Form 1 is for purchasing NSC. It is basically an application form. Form 2 is for naming a beneficiary or a nominee. You will need this only if you didn’t mention a beneficiary or a nominee in Form 1. Finally, we have the Form 3, which will be required if you want to change the nominee or the beneficiary. That’s all! There are no other forms that you need to deal with.

Are Premature Withdrawals Allowed?

No, that is not possible under NSC. The only three conditions under which premature withdrawals are allowed are:

  • If the certificate owner has died.
  • If the court has given an order to liquidate the certificate before maturity.
  • If the certificate owner has forfeit it because of a pledge.

If premature withdrawals happen, here are the conditions for payments:

  • If premature withdrawal is taking place within 1 year from purchase date, just the investment amount will be returned. Any interest earned will be returned to government treasury.
  • If the premature withdrawal is taking place between 1 and 3 years from purchase date, interest will be paid but at simple interest rates and not compounded interest.

Is It Possible to Transfer NSC?

Yes you can do that. There are two types of transfer:

  1. Transferring from one post office to another post office: This may happen if a person relocates. An application is to be made with the old post office. It will be approved and transfer will be made to the new post office. However, in case of joint certificates, both holders will have to sign the application for the transfer to take place.
  2. Person to person transfer: One person may decide to transfer the NSC to another person. For this to happen, the Postmaster of the post office from where the certificate was purchased has to provide a consent in writing. There are three scenarios under which such transfer is allowed:
    • It is transferred to a nominee if the person who originally held the certificate has died.
    • The court has ordered the holder of the certificate to transfer it to another person.
    • One of the joint holders of the certificate wants to transfer it completely to the other holder.

There are however certain conditions that need to be fulfilled for such transfers to take place:

  • The certificate should have completed at least 1 year of tenure from the date on which it was purchased.
  • The transfer application is made in the prescribed form and has been signed by joint holders (if the certificate is held jointly).
  • In case the certificate is in name of a minor, the holder (who is the guardian) needs to prove that by making the transfer, it will serve towards the minor’s best interest.

Duplicate NSC

What if your NSC is lost, damaged or even stolen? Well, you can apply for a duplicate one. Here are a few things you need to remember for that:

  1. You need to apply to the same post office from where you originally purchased the certificate.
  2. If the original post office is currently not accessible (for example, you have relocated), you can apply for the same with a different post office. The other post office will then forward the application to the original post office.
  3. You need to provide the following details:
    • Certificate number.
    • Purchase date.
    • The investment amount.
  4. Clearly mention the reason which made you apply for a duplicate certificate.
  5. If certificate(s) value exceeds INR 500, an indemnity bond guaranteed with approved securities of having a bank guarantee has to be provided.
  6. The duplicate certificate can be redeemed or encashed only and only from the post office that issued the duplicate certificate. This means that even if you have relocated after getting the duplicate certificate, you will have to come to the original post office to redeem it.

Are There Any Charges To NSC?

You will have to pay a charge of INR 5.00 under following situations:

  • In case the certificate needs to be transferred to another entity or to another person.
  • For the certificate of discharge after the certificates have been encashed post maturity. The certificate of discharge is issued by Postmaster.
  • If duplicate certificate requests are made.
  • If certificate denomination has to be changed.
  • For appointment of nomination once the certificate has already been issued.
  • For changing nomination.

Well, that’s pretty much all essential information about NSC or National Saving Certificate. In case you have further questions, feel free to drop your messages in the comments section. We will revert back to you as soon as possible.

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