An attractive fixed income option

Looking to diversify investment beyond bank FDs? Consider National Savings Certificates

If you are a conservative investor with a preference for fixed return instruments, and are looking to diversify your investment beyond bank fixed deposit schemes, National Savings Certificate (NSC) is an option you can consider. NSC is a fixed return investment scheme offered by the Centre, implemented through India Post.

The minimum investment in the scheme is ₹100, and additional investments can be made in the multiples of ₹100. There is no cap on the maximum amount that one can invest in the scheme. NSC is similar to a term deposit. However, investments in NSC have a five-year lock-in.

The scheme scores over conventional bank FDs on two parameters. First, the interest rate currently is higher than what banks offer.

The rates for all small savings schemes including NSC are modified every quarter and the same is notified by the government. However, the interest rate prevailing at the time of investment will hold good till maturity.

The current interest rate (April-June 2018 quarter) is 7.6 per cent. Banks currently offer interest rates of 6-7.2 per cent on fixed deposit schemes for five years. Also, the safety profile of NSC, guaranteed by the government, is higher than that of FDs.

The interest payment under the scheme will be made only at the time of maturity, and hence this will suit investors who have enough liquidity and are not dependent on interest income for their regular needs.

The interest is compounded annually. For instance, if you invest ₹1,000 in year one, the amount will grow to ₹1,442 at the end of year five, assuming an interest rate of 7.6 per cent.

Second, the investment and the interest earned under the scheme are eligible for tax deduction under Section 80C of up to ₹1.5 lakh. For instance, if you purchase certificates worth ₹10,000, you are eligible for the Section 80C tax benefit on this amount.

And in the second year, if you invest an additional ₹5,000, and earn an interest of ₹760 on the first year’s investment, you can claim a tax deduction on ₹5,760, which is the NSC investment in the second year as well as the interest earned. However, the interest income of the fifth year is paid out, not re-invested, and hence is not eligible for the Section 80C tax deduction. Also, the entire interest income earned over the five years is taxable. There is no tax deducted at source though.

The investor has to pay the applicable tax (based on his income-tax slab).

How to invest?

You can open an account at the nearest post office after submitting the documents required to complete the know-your-customer (KYC) process, along with the application form and other requisite documents. In case you move cities, you need not fret. It is quite easy to transfer the certificate from one post office to another.

Who can invest?

The scheme is open only to individual resident Indians. Though the scheme has a five-year lock-in, in case of emergencies, one can use NSC as collateral to borrow from banks and NBFCs. Most banks offer secured loans backed by NSC. However, one needs to get a transfer stamp from the post office on the certificate and transfer it to the lending bank. An investor in NSC can nominate a family member (including minors). The nominee (even if not the legal heir) in an NSC instrument gets the money in the event of the investor’s demise.

With the recent hardening of interest rates, the government could revise upward the interest rate on NSC, too, which can make the deal even sweeter for investors. The interest rate for investments made in the July-September 2018 period is expected to be announced soon.

The writer is co-founder, RaNa Investment Advisors.

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