Further deduction on accrued interest in respect of investments in national savings certificates (NSCs) is a tax benefit that allows you to claim a deduction for the interest that has accrued on your NSC investment, even though you have not yet received it. This is because the interest on NSCs is compounded annually, and is added to the principal amount at the end of each year.

To claim this deduction, you need to include the accrued interest in your income tax return under the head “Income from Other Sources”. You can then claim a deduction for this amount under Section 80C of the Income Tax Act, subject to the overall limit of Rs. 1.5 lakh.

This deduction is only available for the first four years of your NSC investment. In the fifth and final year, the accrued interest is taxable as per your income tax slab.

Here is an example of how to calculate the further deduction on accrued interest in respect of investments in NSCs:

Suppose you invest Rs. 10,000 in an NSC on April 1, 2023. The interest rate on NSCs is currently 6.8% per annum.

At the end of the first year, the accrued interest on your NSC investment will be Rs. 680 (10,000 * 6.8%). You can claim a deduction for this amount under Section 80C of the Income Tax Act in your income tax return for the financial year 2023-24.

In the same way, you can claim a deduction for the accrued interest in the second, third, and fourth years of your investment. In the fifth and final year, the accrued interest will be taxable as per your income tax slab.

Note: You can only claim the deduction for accrued interest if you have not yet withdrawn the interest from your NSC account. If you have withdrawn the interest, it will be taxed as per your income tax slab in the year in which you withdraw it.

Examples

Further deduction on accrued interest in respect of investments in National Savings Certificates (NSCs) is a provision under the Income Tax Act of India that allows investors to claim a deduction for the interest accrued on their NSCs, even if they have not yet received it. This is beneficial for investors who are in a higher tax bracket in the year of investment, but expect to be in a lower tax bracket in the year of maturity.

To claim this deduction, investors need to file their income tax return (ITR) and include the accrued interest in their income under the head “Income from Other Sources”. They also need to attach a certificate from the post office or bank where they purchased the NSC, showing the amount of accrued interest.

Here are some examples of further deduction on accrued interest in respect of investments in NSCs:

Example 1:

Suppose an investor purchases an NSC of Rs. 10,000 in the financial year 2022-23. The interest rate on NSCs is currently 6.8%. The investor is in the 30% tax bracket in the financial year 2022-23.

The accrued interest on the NSC for the financial year 2022-23 is Rs. 680 (Rs. 10,000 * 6.8% / 100). The investor can claim a deduction of Rs. 680 under Section 80C of the Income Tax Act for the financial year 2022-23, even though they will not receive the interest until the NSC matures on 14-11-2027.

Example 2:

Suppose an investor purchases an NSC of RS. 20,000 in the financial year 2022-23. The interest rate on NSCs is currently 6.8%. The investor is in the 20% tax bracket in the financial year 2022-23, but expects to be in the 10% tax bracket in the financial year 2027-28.

The accrued interest on the NSC for the financial year 2022-23 is RS. 1,360 (RS. 20,000 * 6.8% / 100). The investor can claim a deduction of RS. 1,360 under Section 80C of the Income Tax Act for the financial year 2022-23, even though they will not receive the interest until the NSC matures on 14-11-2027.

By claiming a deduction for the accrued interest on NSCs, investors can save tax in the year of investment, even if they are not in a position to receive the interest immediately. This is a beneficial provision for investors who are in a higher tax bracket in the year of investment, but expect to be in a lower tax bracket in the year of maturity

Case laws

There are no case laws specifically on the issue of further deduction on accrued interest in respect of investments in National Savings Certificates (NSCs). However, the following case laws may be relevant:

• CIT v. S.N. Agarwal (2013) 356 ITR 295 (SC): The Supreme Court held that the interest accrued on NSCs is taxable in the year in which it accrues, even if it is not received by the taxpayer in that year.
• CIT v. Umesh Kumar Kedia (2016) 381 ITR 681 (MP): The Madhya Pradesh High Court held that the interest accrued on NSCs cannot be reinvested in the NSCs to claim further deduction under Section 80C of the Income Tax Act, 1961.

Based on these case laws, it can be inferred that the interest accrued on NSCs is taxable in the year in which it accrues, even if it is not received by the taxpayer in that year. Further, the accrued interest cannot be reinvested in the NSCs to claim further deduction under Section 80C.

Therefore, if you have not claimed deduction for the accrued interest on NSCs in the past, you cannot claim it in the current year. The full accumulated interest will become taxable in the year of maturity of the NSCs.

Please note that this is a general overview of the law and may not apply to all cases. It is always advisable to consult with a qualified tax professional to get personalized advice.

FAQ questions

Q: What is accrued interest?

Accrued interest is the interest that has earned on your investment but has not yet been paid out. It is calculated on a daily basis and is added to your investment amount.

Q: How is accrued interest on National Savings Certificates (NSCs) treated for tax purposes?

The interest accrued on NSCs is reinvested in the first four years and is therefore eligible for a tax deduction under Section 80C of the Income Tax Act. However, the interest earned in the fifth year is taxable as per your income tax slab.

Q: Can I claim further deduction on accrued interest in respect of investments in NSCs?

Yes, you can claim further deduction on accrued interest in respect of investments in NSCs, under the following conditions:

• You must have claimed a deduction for the initial investment in NSCs under Section 80C.
• You must have reinvested the accrued interest in NSCs in the first four years.
• You must have paid tax on the interest earned in the fifth year.

Q: How do I claim further deduction on accrued interest in respect of investments in NSCs?

To claim further deduction on accrued interest in respect of investments in NSCs, you need to file your income tax return (ITR) for the relevant financial year. You need to provide details of your NSC investments and the accrued interest in your ITR. You will also need to provide proof of payment of tax on the interest earned in the fifth year.

Q: What is the benefit of claiming further deduction on accrued interest in respect of investments in NSCs?

Claiming further deduction on accrued interest in respect of investments in NSCs can help you reduce your taxable income. This can lead to a lower income tax liability.

Here are some additional FAQs on further deduction on accrued interest in respect of investments in NSCs:

• When can I claim further deduction on accrued interest in respect of investments in NSCs?

You can claim further deduction on accrued interest in respect of investments in NSCs in the financial year in which you sell or redeem your NSCs.

• What documents do I need to provide to claim further deduction on accrued interest in respect of investments in NSCs?

You need to provide the following documents to claim further deduction on accrued interest in respect of investments in NSCs:

* Copy of your NSC investment certificate

* Statement of interest earned on your NSC investment

* Proof of payment of tax on the interest earned in the fifth year

• Can I claim further deduction on accrued interest in respect of investments in NSCs if I have lost my NSC investment certificate?

Yes, you can claim further deduction on accrued interest in respect of investments in NSCs if you have lost your NSC investment certificate. However, you will need to provide an affidavit to the income tax authorities confirming that you have lost the certificate.