National Savings Certificates: A safe option

In this article we’ll take a close look at National Savings Certificates, and compare them with other investment avenues.

What do investors look for when they decide to invest in a particular instrument? They consider two main things – risk and return. Does it offer high returns? Does it involve a lot of risk? That’s because there’s a tradeoff between returns and risk -- that is, there’s a direct correlation between them. Higher the returns, higher the risk. Of course, there’s another dimension, and that is income tax. While some investments have income tax advantages, others don’t.

It goes without saying that cautious investors go for products that involve a minimum level of risk. And there are many options to choose from – bank fixed deposits, Public Provident Fund (PPF), National Savings Certificates (NSC), National Pension System (NPS), Sukanya Samriddhi Yojana (SSY) and so on. All these involve minimum amount of risk but, of course, the returns they offer are much lower than, say, equity. In addition, these instruments also enjoy a tax advantage. Under Section 80C of the Income Tax Act, you can claim a deduction of Rs 1.5 lakh from your taxable income by investing in these. In this article we’ll take a close look at National Savings Certificates, and compare them with other investment avenues.

 

What are National Savings Certificates?              

National Savings Certificates, or NSC, were introduced soon after Independence to encourage small savings among Indians, and to collect funds for nation-building. NSC was very popular then, and continues to retain its popularity today, despite the plethora of options available to investors today. This scheme is part of the postal savings system of the Indian Postal Service.

The main attraction of NSC for investors is that it is risk-free since it is backed by the government, carrying a sovereign guarantee. So investors can be sure that they can get their principal and interest back when they are due. Apart the low risk, National Savings Certificates are also attractive because they offer decent interest rates. These rates are fixed from time to time by the government, and are currently at 8 percent, which is slightly more than what most bank fixed deposits offer. However, you must remember that interest rates on NSC are compounded annually, while banks generally compounded them every quarter. So the actual interest that you earn could be higher for some bank fixed deposits.

NSC certificates have a five-year tenure, so you can say that they are comparable to tax-saving fixed deposits available under Section 80C. You can invest in NSCs through any post office in India. The minimum investment is Rs 100, and in multiples of Rs 100. There is no upper limit for investing in National Savings Certificates.

National Savings Certificates are mainly intended for capital protection rather than growth. That is, protecting the value of your capital against inflation. Inflation erodes the real value of your capital year after year. For example, if inflation is at 6 percent, and you have capital of Rs 1 lakh, the real value of that capital will be  Rs 94,000 the next year, and Rs 88,360 the next. So if you don’t invest it in anything, you will be left with zero capital in a few years! By investing in a scheme like NSC, you will be protecting your capital, plus earn a little more. If inflation is 6 percent and NSC interest rate is 8 per cent, your real rate of return would be 2 percent.

National Savings Certificates are not inflation protected. And if inflation goes above the rate of interest offered by NSC, you will end up with negative returns. However, that’s an unlikely possibility, since interest rates are revised from time to time so that they remain a few percentage points above the inflation rate.

If you want to grow your capital, you will have to invest in an instrument that offers much higher returns, like 10-20 percent. Instruments like equity, equity funds and real estate have the potential to deliver such returns. But you must remember that these are prone to market risk, and past performance is no guarantee of future returns.

 

Income Tax Advantage

The biggest attraction of National Savings Certificates is the deduction it offers from income tax. Many people invest in NSCs just for this reason – to save income tax. Certainly, there’s considerable benefit in investing in NSCs. You can claim a deduction from taxable income up to Rs 1.5 lakh by investing in these certificates.

While tax is not deducted at source -- unlike bank deposits where 10 percent is deducted if interest earnings exceed Rs 10,000 a year -- interest earned on NSC is taxable. However, you can reinvest the interest, which will then be eligible for income tax rebate under Section 80C. Of course, the maximum income tax rebate you can claim under this section for all your investments is restricted to Rs 1.5 lakh a year.

 

Features of National Savings Certificates

Here in a nutshell are the features of NSC:

• The tenure is for a period of five years.
• Individuals, joint individuals and minors supported by guardians can invest in the scheme.
• You can invest in multiples of Rs 100, and there is no upper limit.
• Hindu Undivided Families (HUFs), trusts and companies cannot invest in NSC.
• NSC accounts are available in three types – single holder, joint certificate A and joint certificate B. Joint certificate A is payable to both holders in maturity. In joint certificate B, the amount on maturity is payable to either of the two holders.
• National Savings Certificates can be used as collateral for loans.
• Only Indian residents are eligible to invest in NSCs.
• Investments can be prematurely withdrawn only on the death of the primary holders.
• You can encash NSC on maturity at the post office you bought it from. However, you can transfer the NSC to any post office across the country.
• Interest rates are revised every quarter according to the prevailing rate of government bonds. But this is applicable to new investors only. If you have purchased NSC at the prevailing rate, that rate will remain unchanged for the five-year tenure.
• No age has been specified for investments in National Savings Certificates. However, minors may need to have a guardian’s consent.

Advantages of investing in National Savings Certificates

• Safety: Since it’s backed by the government, there is no risk involved.
• Good for small investors: The minimum investments are quite small (Rs 100), so even those with very small investible surpluses can invest in this scheme.
• Tax benefit: There’s of course the income tax benefit under Section 80C of the Income Tax Act that enables you to reduce your taxable income by up to Rs 1.5 lakh.
• Decent returns: Considering the safety aspect and the tax advantages, interest rate on NSCs, which are slightly higher than bank FDs, are fairly attractive.
• Convenient: Since no post office is a few metres away from any Indian, it’s very convenient to invest in NSCs. You can invest in them wherever you are in the country, even in rural and remote areas.
• Collateral: You can use NSC as collateral to take loans. This gives some amount of liquidity to this instrument.
• Regularity: Since the amounts needed to invest are quite small, you can put cash in NSCs whenever you have some cash. This ensures you make optimum use of your money and leave no spare cash lying around. You can invest every month, quarter or year. You can plan the investments so that the National Savings Certificates mature at regular intervals, providing you a steady income, say, after retirement.

How to open an NSC account

You can open an NSC account at any post office in the country.

1. Fill the application form that is available at the post office.
2. You need to take original proof of identity and address and two photographs along with you.
3. You can buy certificates in multiples of Rs 100. These can be purchased at the post office and can be paid in cash, draft or cheque. The cheques or drafts have to be made in favour of the postmaster of the post office from where you bought the NSC.

How to encash NSC after maturity

The National Savings Certificates that you have purchased can only be encashed at the post office you have bought it from. However, there is a transfer facility available, which enables you to transfer the NSC to the post office of your choice. Here’s what you need to encash NSC.

1. Original copy of the NSC certificate
2. Proof of identity – Aadhaar card, passport, or driving licence
3. NSC encashment form
4. If you are the holder of the NSC, you will have to sign on the back of the NSC to show that you have received payment from the post office

How to transfer NSC

As we mentioned earlier, NSC can be transferred to the post office of your choice across the country. If you have moved from your earlier residence, it’s better to do the transfer so that it’s more convenient to encash the certificates on maturity.

1. You will need to fill an application form at the post office you bought the certificates from to make the transfer. The form is available at the India Post web site.
2. You will need to fill details like name, number of NSC, date of issue.
3. If you have purchased it on behalf of a minor, you will need date of birth of the minor and the guardian’s name
4. Signatures of the NSC holder as well as the nominee are required.
5. You will also have to give details of the nominee, including name and date of birth.
6. The postmaster will then verify the details, sign the form and send it to the post office you have requested.
7. You can also redeem the NSC at any post office without making a transfer, but the process could take as long as one-and-a-half months.
8. You can only do the transfer before the National Savings Certificates have matured.

How to replace lost NSC certificates

You can encash NSC after maturity only if you produce the certificate. Here’s what you do if your certificate is lost or destroyed.

1. File an FIR: You will have to file an FIR at the nearest police station, and get a copy of the FIR
2. Indemnity bond: Get an indemnity bond from a notary public printed on Rs 100 non-judicial stamp paper for the issue of a duplicate certificate. This is not needed if the certificates are only mutilated/damaged and not lost.
3. Get the form: You will need to get an application form. This is available at the India Post web site. You can download it here.
4. Fill in details: You will need to fill in details like name, serial number of the certificates, date of issue, denominations, name of the post office where the certificates were issued.
5. Identification: You will need proof of identity as well as someone who will vouch for your identity.
6. Submit documents: Submit the form along with the FIR copy and indemnity bond to the post office.
7. Fees: You will have to pay Rs 5 for the duplicate certificate.

Nomination facility

Buyers of National Savings Certificate have to name a nominee, in the event of the demise of the NSC holders before the end of the five-year tenure of the certificates. The nominees can have the option of encashing the certificates with an application to the postmaster and producing a death certificate.

Using NSC as collateral for loans

National Savings Certificates can be used as collateral for loans. In order to get the loan, the certificates have to be transferred to the bank or lending institution. Here’s how you go about using NSC as collateral:

1. Fill the form: You will need to fill a form. This can be downloaded from the India Post web site. You will need to give details like serial number of certificates, denomination etc and sign the form.
2. Give originals: You will have to submit the original certificates.
3. Pledgees: You can pledge NSC certificates only to certain approved institutions under Rule 19 of the Post Office Savings Certificate Rules 1969. These include Reserve Bank of India, scheduled banks, cooperative societies/ banks, the government or a local authority.
4. Verification: The postmaster will then verify the application, and if approved, will endorse the certificate by writing “Transferred security to….” on the certificate. A remark to that effect will be added in the remarks column.
5. Deemed owner: The pledgee will then be considered the deemed owner of the certificates. The certificates will be re-transferred to the owner only when the post office gets a release order from the pledgee.

NSC vs PPF

Risk-averse investors have the choice of investing between National Savings Certificates and Public Provident Fund (PPF). What’s the difference between the two? And is one better than the other?

Both PPF and NSC have many things in common. They are aimed at small investors and have the backing of the government and thus free from risk, and both are quite illiquid, that is, the invested funds are locked in for a long period of time. Another thing that they have in common is that both are eligible to a deduction in taxable income to the extent of Rs 1.5 lakh under Section 80C of the Income Tax Act. NSC and PPF are some of the best avenues to save tax, and are thus popular among many investors just for that reason alone. Interest rates on both instruments are similar too.

While there are a lot of similarities between the two, there are differences too. One of the differences between the two is the lock-in period. While National Savings Certificates have a lock-in period of five years, PPF have a much longer tenure of 15 years. So if you look at it from the liquidity point of view, NSC scores some points over PPF. Of course, you can make partial withdrawals after five years in the case of PPF, and get loans too. NSC, on the other hand, can be used as collateral for loans, so you can say that it confers some amount of additional liquidity on it.

The major difference between PPF and NSC is the tax benefits. The only tax benefit you get on NSC is the deduction in taxable income. Interest earnings are added to your income and taxed according to the tax slab you’re in. On the other hand, in the case of PPF, not only is the initial amount invested free from the tax, the interest earned as well as the final corpus on maturity are free from tax. That is, PPF enjoys what is called an EEE benefit (exempt, exempt, exempt). So in terms of tax saving, PPF scores over NSC.

Unlike PPF, there’s no cap on the amount you can invest in National Savings Certificates. The maximum you can invest in PPF in a year is restricted to Rs 1.5 lakh.

Another thing to note about the two is the way interest rates are treated. Interest rates are fixed for both instruments every quarter. However, in the case of NSC, the interest rates prevailing at the time of investment will be applicable for the entire tenure of five years. In PPF, the interest rates on your investment will also change with any new announcement on interest rates. So if current interest rates are 8 percent and hiked to 8.5 percent in the next quarter after you’ve made an investment, it won’t affect your NSCs, but the interest rate on PPF will change and you get that benefit.

NSC are more suited for short-term goals – for example, if you plan on buying a car five years down the line, or plan on making a down payment on a house. PPF is better for longer-term goals, like retirement.

NSC vs fixed deposits

Another investment avenue that cautious investors prefer is a fixed deposit in a bank. Like NSC, FDs are a relatively safe investment and offer similar returns. And certain kinds of FDs – like the five-year FD – also enjoy the same tax advantages as National Savings Certificates under Section 80C of the IT Act; that is, a reduction in taxable income to the extent of Rs 1.5 lakh.

There are some differences between the two, however. One is that NSCs can be said to be safer than bank deposits because they enjoy a sovereign guarantee from the Government of India. FDs don’t have that advantage, though the risks are quite small.

Another difference is that tax is deducted at source in the case of FDs, if interest income exceeds Rs 10,000 a year. There’s no TDS in the case of NCS. However, interest earned on both instruments are subject to income tax. How much tax you pay will depend on your income slab. However, you can reinvest the interest earned on NSC, and can claim Section 80C exemption for that. However, this reinvestment will, along with all your other Section 80C investments, will be subject to a limit of Rs 1.5 lakh a year. So you can’t really say that there’s an additional tax advantage here.

Generally, interest rates on National Savings Certificates are slightly higher than those on FDs. Currently, NSC interest rate is 8 percent, while banks offer between 7 and 8 percent. But interest on bank FDs are compounded quarterly, and that on NSC is compounded on an annual basis. So actual returns could be slightly higher in the case of bank FDs. Of course, this will depend on interest rates. While NSC interest rates are fixed by the government each quarter, those on FDs are fixed by individual banks, depending on the RBI’s monetary policy, their spreads and so on.

One advantage that NSC has over bank FDs is that National Savings Certificates can be used as collateral for loans. Five-year FDs, on the other hand, cannot be used as collateral. As far as liquidity is concerned, there’s little to choose between the two, as both have a tenure of five years and locked in for that period.

On the convenience front, we can say that bank FDs have the advantage. If you have Internet banking, it takes a few seconds to open an FD. Buying NSCs is more complicated since it involves going to the post office, filling forms and so on. Plus, you have to submit the physical certificate at the post office where you opened the account, and if you lose the certificate, you will have to go through a tedious process to get a replacement.

NSC vs Kisan Vikas Patra

Kisan Vikas Patra (KVP) is another government-backed savings scheme which was initially introduced for farmers, but later made available to the general public. It shares many features of National Savings Certificates, like low risk since it’s government-backed, and can be bought at post offices around the country.

Unlike NSC, which are issued in multiples of Rs 100, KVP is available in multiples of Rs 1,000. There is no upper limit on the amount that can be invested. Like NSC, interest rate is fixed from time to time by the government and is currently at 7.7 percent, which is slightly lower than that offered by National Savings Certificates. KVP may have an edge over NSC in the liquidity department, since it can be encashed in just 2.5 years instead of five in NSC.

However, the biggest disadvantage is KVP does not have any income tax benefit that NSC enjoys. So if you want to save tax, NSC would be your choice.

NSC vs ELSS

The only thing that NSC has in common with an ELSS scheme is that both enjoy tax benefits under Section 80C up to Rs 1.5 lakh. Both instruments are very different in terms of risk and returns. An ELSS mutual fund invests in equity, which as we all know, has the potential to offer much higher returns than National Savings Certificates. While NSC currently offers an interest rate of 8 percent, you can earn as much as 10-20 percent returns on ELSS funds, depending on market conditions.

Of course, ELSS funds involve much more risk than NSC, which by their very nature are low-risk, and with the sovereign guarantee of the Government of India, involves zero risk, and are a cautious investor’s delight. Returns from ELSS funds are far more unpredictable. But if we go by past experience, over the longer term, equity has outperformed most other asset classes. If you want capital protection, NSC would be an ideal choice, but if capital appreciation is what you want, you should invest in ELSS funds.

ELSS funds have a slight edge over NSC in the liquidity department. While NSC has a lock-in period of five years, ELSS funds have to be held only for a period of three years in order to claim Section 80C benefit. Of course, you can continue holding ELSS funds for as long as you like. So there’s more flexibility here, unlike NSC, which have to be encashed at the end of the five-year tenure.

Like NSC, interest on which is taxed, returns from ELSS too are subject to income tax. However, unlike NSC, returns from ELSS are not added to your income and taxed according to the tax slab. ELSS returns are subject to long-term capital gains tax at the rate of 10 percent without indexation or 20 percent with indexation. If you hold the ELSS funds for a longer period of time, your tax liability could be lower because of the indexation benefit.

NSC vs NPS

There are a couple things that NSC has in common with National Pension System, or NPS. One is that both are government-run schemes. Another is that both enjoy tax benefits in the form of Section 80C and you can claim a deduction in taxable income up to Rs 1.5 lakh. NPS enjoys an additional benefit of Rs 50,000 deduction in taxable income under Section 80CCD (1).

The NPS scheme is open to government employees as well as the general public. Tier I is for government employees and Tier II for the others. NPS is very different from NSC since it’s a pension scheme, and not a savings scheme. Since some of the corpus is invested in equity, returns could be higher too – say 10-12 percent depending on stock market conditions.

Conclusion

There are many options if you want to invest in a safe investment avenue and save tax at the same time, and National Savings Certificates is just one of them. If you want to lock in your money for the medium term of five years, NSC will be good option. But if you are prepared to invest for a longer period, PPF could be a better choice. The lock-in period for PPF is of course much longer, at 15 years. But the tax savings are more since even the interest earned is exempt from income tax, unlike NSC.

FAQs

I am an NRI. Can I invest in an NSC?

No. National Savings Certificates can only be purchased by resident Indians only. However, in case you purchased an NSC before moving abroad, then the NSC can be held until maturity

Is NSC a risky investment option?

No. NSCs are backed by the Government of India and offers one of the higest returns amongst fixed rate instruments.

What are the tax implications of NSCs?

While you can invest up to Rs 1.5 lakh per annum under Section 80C of the Income Tax Act. However, the interest earned feature a different tax treatment. As interest earned from the first four years is deemed to be reinvested, it is exempt from income tax. However, the interest earned in the fifth year is taxable.