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National Savings Certificate (Series VIII)

To have the cake and eat it too is a popular figure of speech, which is true when it comes to NSC investments. You can have the best of both the worlds, with assured returns and tax benefits on invest

To have the cake and eat it too is a popular figure of speech, which is true when it comes to NSC investments. You can have the best of both the worlds, with assured returns and tax benefits on investment. If planned well, one can create a regular income stream using this instrument.

Features

Eligibility
You need to be a Resident Indian to buy these certificates

Entry Age
• No age is specified for account opening

Investments
• Minimum: Rs 100 per annum
• Certificates are available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000

Interest
• 8 per cent compounded half yearly
• Annualised interest rate works to 8.16 per cent

Tenure
• 6 years

Account holding categories
• Individual
• Joint
• Minor through the guardian

Nomination
• Facility is available

The National Savings Certificate (NSC) is a popular and safe small savings instrument that combines tax-savings with guaranteed returns. This scheme is backed by the government, and is one of the safest investment options available at post-offices. The distribution reach of post office has added to the popularity of this scheme and is much sought after across all investing class.

Investment Objective and Risks
The main objective of investing in the NSC is to avail tax deduction on deposits and guaranteed returns on investment. The six year tenure is used by many to create a regular monthly income stream in retirement.

Capital Protection
The capital in the NSC is completely protected as the scheme is backed by the government of India, making it totally risk-free with guaranteed returns.

Inflation Protection
The NSC is not inflation protected, which means whenever inflation is above the current guaranteed interest rate of 8 per cent; the deposit earns no real returns. However, when the inflation rate is below 8 per cent, it does manage a positive real rate of return.

Guarantees
The interest rate on the NSC is guaranteed, though the rate can change as notified by the government from time to time. Currently the interest rate on NSC is 8 per cent per annum compounded half yearly.

Liquidity
The NSC is liquid, despite the 6-year stipulated lock-in. The liquidity is offered in the form of loans and withdrawals subject to conditions.

Credit Rating
As the NSC is backed by the government of India, it does not require any commercial rating.

• You can pledge the NSC certificates to obtain loans, the amount and rate at which the loan is permitted depends on the lending institution.
• A certificate may be prematurely encashed. In case when the certificate is encashed within one year from the date of issue, only the face value of the certificate is payable.
• If the certificate is encashed after completing one year but before the end of three years from the date of issuing the certificate, an amount equivalent to the face value of the certificate together with simple interest is payable.
• If the certificate is encashed after completion of three years from the date of issuing the certificate, the amount payable, inclusive of interest for the denomination of Rs 100 is as indicated in the table below:

Exit Option
Premature encashment of the certificate is permissible.

Risks associated with loss or mutilation of certificate exists, for which a duplicate certificate can be issued on furnishing an indemnity bond in a format prescribed by the post office.

Other Risks
Savings in this product is completely risk free because of the government-backing.

Tax Implications
The sum invested in an NSC is eligible for tax deduction under Section 80C up to the Rs 1 lakh limit stipulated in a financial year including the accrued interest on existing certificates. The interest earned on NSC on a yearly basis is added to the total income under the head ‘Income from other sources’ and the same can be claimed as deduction under Section 80C, making the interest tax-free. However, if the accrued interest is not taxed every year on an accrual basis then the entire income becomes taxable on maturity.

Where to Buy
Certificates can be bought from any head post office or general post office.

How to Buy
Once you have decided on the sum that you wish to invest:
• You need to fill the NSC application form available at the post office.
• Carry original identity proof for verification at the time of buying.
• You can buy the certificate with cash, cheque or demand draft drawn in favour of the postmaster of the post office from where the NSC is being bought.
• Choose a nominee and get a witness signature to complete the formalities when buying the certificate.

Points to Ponder
•Maturity proceeds not drawn are eligible to post office savings account interest for a maximum period of two years
• Certificates are encashable at any post office in India provided one has obtained transfer of the certificate to the desired post office
• Certificates are transferable across post offices
• Interest income is taxable but no TDS certificate is issued

Tips and Strategies
• The assured return on NSC, can be used to create an income ladder.
• Certificates can be bought every month or quarter for appropriate denominations, which on maturity will act as a steady income stream. For instance someone retiring in 2017, can create an income ladder by investing a fixed sum every month from August 2011. Some people use this ladder effect to create an income stream that will last 10-15 years by timing NSC maturity and re-investment to create an assured income in retirement.