Tax saving with Post office NSC

Indian Post Office | admin | July 13, 2011 at 9:23 am

Traditionally , the National Saving Certificate (NSC) has been a favourite investment option, even from a tax-saving point of view. Investments in NSC qualify for a deduction under Section 80C of the Income Tax Act. The investment limit is now Rs 1.2 lakhs. They offer assured returns.

NSCs are issued by post offices. Buying NSC is very easy. Any individual can purchase NSCs in the denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 from any post office in the country. Although mainly issued in physical form, some post offices can also issue them in demat form.

Payments can be made in cash, cheque or demand draft (DD) drawn in favour of the post master. However, the issue of the certificate will be subject to the realisation of the cheque. The minimum investment required is just Rs 100. There is no limit to the maximum amount you can invest. However, the tax benefit is available only for investments up to Rs 1 lakh.

The interest rate on NSC is eight percent. It is payable on maturity. It is to be noted the interest paid at the time of maturity is not tax-free . So, the effective rate of return goes down, vis-a-vis the Public Provident Fund (PPF), where the interest earned is also tax-free .

Premature withdrawals are permitted, subject to some costs. Premature withdrawals can be made under specific circumstances only, such as death of the holder. In case of need, one can pledge NSCs and obtain a loan. They are well-accepted as security for a loan. You can transfer them from one post office to another.

NSCs suit investors looking for tax-saving instruments , which are safer and steadier than the highly volatile equity. It is a longterm investment option offering assured returns. NSC is issued for a maturity period of six years. If you buy NSC worth Rs 10,000 today, you will get about Rs 16,000 on maturity at the end of the sixth year.

The interest rate is fixed for the period and does not vary with the changes in market rates. The interest paid annually is reinvested every year and the accrued interest is paid along with the principle at the time of maturity. As the interest rate is fixed for the life of the instrument, it is a hedge against market interest rate movements.

Before investing, you must keep in mind the fact that this is not a liquid instrument. Although the lock-in period is six years – lesser than the lock-in period of PPF – it is more than the lock-in period of fixed deposits. Also, you do not get any benefit in case the interest rates increase.

NSCs can be taken in single or joint names. Also, nomination facility is available on these instruments. They are convenient, safe, and tax-saving instruments, providing assured returns.

Source: Economic Times