The National Savings Certificate (NSC) is an investment scheme floated by the Government of India. It is an investment option which is a combination of attractive interest rate, safety for the money invested, income tax benefits and also provides the chance to increase the amount invested and that too by a substantial amount.
How NSC works?
When it comes to investing in NSC it is very important to understand 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.
Once the investment has been made, it earns an interest rate based on the rates associated with the type of certificate bought. The maturity date for these certificates 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.
To understand this reinvestment business, let’s take the example of an investment of ₹10,000 in NSC Issue IX. Being part of Issue IX, the maturity period will be 10 years and the interest rate will be 8.8% per annum (as of Jan 2016). In the first year, you will earn ₹880 as interest and you will declare ₹10,000 as investments in NSC under section 80C. In the second year, the ₹880 that you earned will be added to the original investment bringing the invested amount to ₹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 an 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 ₹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 ₹20,000 as an 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.
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 a HUF and a trust. These certificates come in denominations ranging from ₹100 to ₹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 ₹100 to ₹10,000 and come 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 come with no limit on the amount that can be invested in them but there is a limit on the minimum investment, which is ₹100.
Modes of handling 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 making 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 issued to two adult holders and is payable to both when the certificates mature. It can be operated 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.
Some of the important features of NSCs are as under:
- 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 ₹100.
- There are also specific denominations in which these certificates can be taken and these are ₹100, ₹1,000, ₹5,000 and ₹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 entitled to the proceeds then they can be encashed at any post office.
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 documentation may include:
- Proof of identity
- Proof of address
There are three forms that are central to the issuance and maintenance of an investment in National Savings Certificates. 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 to the post office at which the NSC was purchased.
How to buy NSCs?
Buying an NSC certificate is an incredibly simple process. However, one cannot buy NSC online. It can only 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 issued upon realization of the payment made. In other cases, the certificates will be issued immediately.
Step 6: Check the certificates for clerical or mathematical errors. If there are any mistakes you can get them corrected.
If handled right, investments in NSC can offer 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.