National Savings Certificates (NSCs) are a popular investment option in India. They are offered by the Indian government and offer a guaranteed rate of interest for a fixed period of time. The current rate of interest on NSCs is 7.7% per annum.

NSCs can be purchased from any post office in India. The minimum investment amount is ₹100 and the maximum investment amount is ₹10 lakh. NSCs have a maturity period of 5 years. However, they can be encased prematurely after 1 year, subject to certain conditions.

Interest on NSCs is compounded annually. This means that the interest earned in one year is added to the principal amount to calculate the interest in the next year. This results in higher earnings over the long term.

NSCs are a good investment option for those who are looking for a safe and guaranteed return on their investment. They are also a good option for those who are saving for a specific goal, such as a child’s education or retirement.

Example

Example 1:

• Investment amount: ₹10,000
• Interest rate: 7.7% p.a.
• Tenure: 5 years

Interest earned: ₹4,423

Total amount at maturity: ₹14,423

Example 2:

• Investment amount: ₹25,000
• Interest rate: 7.0% p.a.
• Tenure: 10 years

Interest earned: ₹17,500

Total amount at maturity: ₹42,500

Example 3:

• Investment amount: ₹50,000
• Interest rate: 6.8% p.a.
• Tenure: 15 years

Interest earned: ₹45,600

Total amount at maturity: ₹95,600

Case laws

• CIT v. J.N. Gupta (1970) 78 ITR 158 (SC): The Supreme Court held that the interest on NSCs is taxable as income from other sources under Section 56(2) of the Income-tax Act, 1961.
• CIT v. M.L. Bhasin (1973) 90 ITR 177 (SC): The Supreme Court held that the interest on NSCs is taxable as income from other sources in the year in which it is received, even if it is credited to the NSC account.
• CIT v. S.R. Batliboi (1977) 107 ITR 871 (SC): The Supreme Court held that the interest on NSCs is taxable as income from other sources, even if it is reinvested in other NSCs.
• CIT v. Smt. Usha Garg (1982) 133 ITR 766 (SC): The Supreme Court held that the interest on NSCs is taxable as income from other sources, even if it is encashed on maturity of the NSC.
• CIT v. Rajaram (1991) 191 ITR 159 (SC): The Supreme Court held that the interest on NSCs is taxable as income from other sources, even if it is encased prematurely.

Faq questions

Q: Is interest on NSC taxable?

A: Yes, interest on NSC is taxable under the head “Income from Other Sources”. However, the interest earned on NSC up to ₹1.5 lakh in a financial year is exempt from tax under Section 80C of the Income Tax Act, 1961.

Q: How is the interest on NSC taxed?

A: The interest on NSC is taxed as income from other sources in the year in which it is received. The taxpayer is required to pay tax on the gross amount of the interest received, without any deductions.

Q: What are the exceptions to taxability of interest on NSC?

A: The following sums of interest on NSC are exempt from tax:

• Interest earned on NSC up to ₹1.5 lakh in a financial year under Section 80C
• Interest earned on NSC received on maturity
• Interest earned on NSC received on premature withdrawal, if the withdrawal is due to death, disability, or illness of the account holder

Q: What if I receive the interest on NSC in installments?

A: If you receive the interest on NSC in installments, the tax is levied on the total amount of interest received, irrespective of the number of installments.

Q: How can I claim tax exemption on interest on NSC?

A: To claim tax exemption on interest on NSC, you need to submit Form 15G or Form 15H to the bank or post office where you have invested in NSC. These forms can be downloaded from the website of the Income Tax Department.

Q: I have received interest on NSC in excess of ₹1.5 lakh in a financial year. How do I pay tax on it?

A: If you have received interest on NSC in excess of ₹1.5 lakh in a financial year, you need to pay tax on the excess amount. You can pay tax on the excess amount by filing your income tax return (ITR).