National Savings Certificate

  

WHAT IS NATIONAL SAVINGS CERTIFICATE (NSC)?

NATIONAL SAVINGS CERTIFICATE (NSC) is a 5-year post office small savings scheme meant for individuals. Like most of the government promoted schemes, this scheme also provides tax benefits to its investors.

Since it has a backing of the government, it offers guaranteed returns with negligible risk of default and market fluctuations.

Currently, it offers a fixed interest @ 6.8%, compounded quarterly and payable only upon maturity.

 

 

WHAT ARE THE TYPES?

The following 3 types of NATIONAL SAVINGS CERTIFICATE (NSC) are available to investors.

1. Single holder type certificate – This certificate is issued to an adult individual or on behalf of a minor or to a minor who is at least 10 years old.

 

2. Joint A type certificate – This certificate is issued jointly to two adults, payable to both the holders jointly or to the survivor.

 

3. Joint B type certificate – This certificate is issued jointly up to 3 adults, payable to either of the holders or the survivor.

 

 

IMPORTANT POINTS TO NOTE ABOUT NATIONAL SAVINGS CERTIFICATE (NSC)

The following are some of the important features of the NATIONAL SAVINGS CERTIFICATE (NSC) that every investor must know.

1. Investor’s profile – It is best suited to investors who want to lock-in funds for a specific tenure at a fixed rate with negligible risk. It is not suitable for long term investing beyond 5 years since its returns are restricted due to no participation of equity.

 

2. Risk – NATIONAL SAVINGS CERTIFICATE (NSC) is considered as one of the safest investments as it has a sovereign guarantee of the government and involves zero risk of default and interest rate fluctuations.

 

3. Liquidity – NATIONAL SAVINGS CERTIFICATE (NSC) is considered low on liquidity as the amount invested can only be liquidated on maturity i.e. 5 years.

 

4. Taxation – Income earned from this scheme is fixed and treated as income from other sources. Hence, investment proceeds received on maturity is added to total income and taxed as per the applicable slab.

However, the amount invested in the NATIONAL SAVINGS CERTIFICATE (NSC) provides tax benefits under section 80C.

 

5. Volatile – NATIONAL SAVINGS CERTIFICATE (NSC) involves minimum volatility since most of its assets are invested in government securities and AAA-rated corporate bonds.

 

6. Time horizon – This scheme matures in 5 years and is locked until then.

 

7. Regular Income – NATIONAL SAVINGS CERTIFICATE (NSC) does not provide any regular income as the interest earned gets accrued and paid with the principal on maturity.

 

8. Returns – It offers fixed returns in the range of 6% to 7% per annum in the form of interest.

 

9. Asset class – It is a pure debt product.

 

10. Cost – NATIONAL SAVINGS CERTIFICATE (NSC) does not involve any cost of investment.

 

11. Loan facility – Investors can avail loan against the certificate issued under NATIONAL SAVINGS CERTIFICATE (NSC) scheme.

 

 

WHO CAN AND CANNOT INVEST IN NATIONAL SAVINGS CERTIFICATE (NSC)?

It is only meant for Resident Indians. Karta of HUF is also eligible to invest in NSC.

However, Hindu Undivided Family (HUF), Non-Resident Indians (NRI), Companies, Trusts, Co-operative banks and societies are not allowed to invest in this scheme.

 

 

MINIMUM AND MAXIMUM INVESTMENT

An individual can avail of a NATIONAL SAVINGS CERTIFICATE (NSC) certificate with as low as Rs. 100/- with no upper limit.

Investors are not obligated to make any further contributions to this scheme. However, they can choose to invest more if they desire.

Currently, certificates are available in denominations of Rs. 100/-, Rs. 500/-, Rs. 1,000/-, Rs. 5,000/- and Rs. 10,000/-.

 

 

WHERE DOES NATIONAL SAVINGS CERTIFICATE (NSC) TRUST INVEST YOUR MONEY?

Due to its conservative nature, NATIONAL SAVINGS CERTIFICATE (NSC) primarily invests all the investor’s money in fixed return instruments like government securities, government and corporate bonds, etc.

 

EXPECTED RETURNS WITH ILLUSTRATIONS

HISTORICAL DATA OF RETURNS IT GENERATED

 

 

ACCESSIBILITY OF FUNDS AND LOCK-IN, IF ANY

NATIONAL SAVINGS CERTIFICATE (NSC) is a 5-years plan and is locked until the maturity. However, it allows its investors to make premature withdrawals subject to special conditions as stated below;

• On the death of NSC holder.
• On forfeiture by a pledgee who is a Gazetted Government Officer.
• On the order of a court for premature withdrawal of NSC

 

LOAN AGAINST NATIONAL SAVINGS CERTIFICATE (NSC)

Investors can take a loan against NATIONAL SAVINGS CERTIFICATE (NSC) certificate if they meet the below criteria.

• The certificate is in their name.
• The funds will not be utilized for any speculative activities like gambling, horse race etc.

 

 

WHAT ARE THE BENEFITS OF INVESTING IN NATIONAL SAVINGS CERTIFICATE (NSC)?

NATIONAL SAVINGS CERTIFICATE (NSC) offers the following benefits to its investors.

1. Protection from market volatility – Since NATIONAL SAVINGS CERTIFICATE (NSC) is a debt instrument, it provides a fixed return on investment that keeps you protected from market volatility.

 

2. Safe – Since NSC enjoys a sovereign guarantee from the government, it is the safest option with guaranteed returns and carries zero risk of principal loss.

 

3. Low investment amount – One can start investing in NSC with as low as Rs. 100/- with no further commitment.

 

4. No commitment – Unlike PPF, the investors of NATIONAL SAVINGS CERTIFICATE (NSC) are not obligated to make any yearly payments to keep the account active. They can contribute to this scheme how much ever they can and whenever they can.

 

5. No age restrictions – Anyone above 18 years of age can invest in this scheme and that is no restriction concerning the maximum age of investors.

 

6. Save Tax – NATIONAL SAVINGS CERTIFICATE (NSC) will not only help you accumulate wealth for long term goals but also help you save tax under section 80C.

 

7. Zero cost of investment – NATIONAL SAVINGS CERTIFICATE (NSC) does not involve any cost of investment hence, all the returns generated go into the pocket of the investor after tax deduction.

 

 

WHAT ARE THE LIMITATIONS OF INVESTING IN NATIONAL SAVINGS CERTIFICATE (NSC)?

NATIONAL SAVINGS CERTIFICATE (NSC) has the following limitations.

1. Lock-in – NATIONAL SAVINGS CERTIFICATE (NSC) involves 5 years lock-in. Though premature withdrawal is allowed, it is subject to penalties.

 

2. Returns low enough to beat inflation – NATIONAL SAVINGS CERTIFICATE (NSC) offers lower returns as compared to other fixed-income instruments like bonds, liquid funds, debt funds, fixed maturity plans, monthly income plans etc. Returns generated by NSC are not even good enough to beat inflation.

 

3. Returns are taxed – The entire interest earned from the NATIONAL SAVINGS CERTIFICATE (NSC) is treated as “Income from other sources” and is added to the total taxable income and taxed according to the applicable tax slab.

 

4. Loss of opportunity during the market boom – The objective of NATIONAL SAVINGS CERTIFICATE (NSC) is to offer a fixed return on investment to its investors due to which its exposure to equities is restricted. This prevents its investors to benefit from the upswing of the market boom.

 

 

WHO SHOULD CONSIDER INVESTING IN NATIONAL SAVINGS CERTIFICATE (NSC)?

NATIONAL SAVINGS CERTIFICATE (NSC) is most suited to the following investors:

1. Risk-averse investors – Since NATIONAL SAVINGS CERTIFICATE (NSC) is a fixed income product and offers assured returns, it is best suited to risk-averse investors who are ready to compromise on returns but not on safety.

Since it is backed by the government, it also involves zero risk of default. Investors with low liquidity needs and having enough exposure to equities can invest in NSC.

 

2. Investors with low debt exposure – NATIONAL SAVINGS CERTIFICATE (NSC) is a debt product hence, investors with high equity exposure who are looking forward to creating a debt portfolio can consider investing in this option. It can be a very good option for them to diversify and create a retirement corpus.

 

3. Investors looking for guaranteed returns – Investors looking for guaranteed returns as compared to other debt instruments and can stay invested for a minimum of 5 years can consider investing in NSC.

 

 

WHO SHOULD AVOID INVESTING IN NATIONAL SAVINGS CERTIFICATE (NSC)?

NATIONAL SAVINGS CERTIFICATE (NSC) may not be the best investment for the following investors:

1. High-risk-takers – NATIONAL SAVINGS CERTIFICATE (NSC) is a low risk-low returns investment. Young investors especially below 35 years of age, who have age by their side and can take higher risk to earn much better returns by investing in equity mutual funds or direct equities.

 

2. High net income individuals – The entire interest earned from NSC is treated as “Income from other sources” and added to the investors total taxable income and taxed as per applicable slab. Hence, investors who fall in the higher tax slab of 20% or more must also consider other debt products offering tax-free returns.

 

3. Investors with short term liquidity needs – NATIONAL SAVINGS CERTIFICATE (NSC) has a lock-in of 5 years. Hence, anyone looking forward to liquidating their investment before maturity may not be able to do so.

 

4. Senior Citizens – Individuals above 60 years of age should avoid investing in NSC as the funds invested gets locked until 5 years hence, they may not be able to withdraw money in case any emergency strikes.

 

5. Investors looking for regular income – NATIONAL SAVINGS CERTIFICATE (NSC) does not generate regular income for its investors. All the interest earned is accrued and paid with principal upon maturity.

 

 

A PIECE OF ADVICE

THINGS YOU SHOULD DO WHILE INVESTING IN NATIONAL SAVINGS CERTIFICATE (NSC)

NATIONAL SAVINGS CERTIFICATE (NSC) investors must follow the below suggestions while investing to maximize the value of their investment.

1. Diversify your investments – Returns from the NATIONAL SAVINGS CERTIFICATE (NSC) is fixed as it is not market-linked and may or may not be able to beat inflation year on year consistently. Hence, instead of investing all the money in one product, one can also consider diversifying their investment in other market-linked products like balanced mutual funds or bonds issued by the Government of India.

 

2. Understand the product and the risk involved – NATIONAL SAVINGS CERTIFICATE (NSC) involves 5 years lock-in. Hence, investors should be aware of all pros and cons of the investment they are getting into. The amount required on maturity, liquidity needs, risk appetite, etc. should be carefully evaluated before signing up for this scheme.

 

3. Update nomination details – Updating nominee details at the time of opening the account is very important. In case of an investor’s death, the family members should not end up running from pillar to post when they need that money the most to claim your investment proceeds.

 

 

THINGS YOU SHOULD AVOID DOING WHILE INVESTING IN NATIONAL SAVINGS CERTIFICATE (NSC)

NATIONAL SAVINGS CERTIFICATE (NSC) investors must avoid taking the following actions while investing to protect their investment from losing its value.

1. Do not invest if you foresee the need of funds before maturity – NATIONAL SAVINGS CERTIFICATE (NSC) can only be liquidated after 5 years on maturity. Hence, anyone looking for liquidating their investment before maturity should avoid investing this product.

 

2. Looking at it as a standalone investment  – Do not rely solely on this option as it is a debt product and generates fixed returns and may or may not be able to beat inflation in long run, which can result in shortfall in meeting your future financial goals.

It can be one of the good resources for creating a debt portfolio however, a part of the investment should be diversified across to pocket better returns.

 

3. Do not get influenced by anyone but financial experts – A confused investor always has a tendency of reaching out to their friends and relatives for suggestions while making critical investment decisions. That happens irrespective of the knowledge and the level of understanding the friend has about the domain. It is as good as asking a truck driver, how to fly an airplane. Such advices in most cases are based on their individual experiences and hardly on calculations or facts and figures. Hence, instead of blindly following the financial advice of a random friend, investors must act wisely and take assistance of a well qualified financial planner who has sound knowledge about the domain.

 

 

WHAT ARE THE RISKS INVOLVED IN NATIONAL SAVINGS CERTIFICATE (NSC)?

NATIONAL SAVINGS CERTIFICATE (NSC) investors should be mindful of following risks involved in this investment:

1. Inflation Risk – Though NATIONAL SAVINGS CERTIFICATE (NSC) ensures the highest level of safety of principal and give assured returns, it may or may not be able to beat inflation year on year since it is not market-linked. The average rate of inflation is around 6% - 8% per annum whereas net returns generated from this scheme can go below 6% or even lesser. This may lead to shortfall when you look at the corpus you created in meeting your financial goals.

To reduce the risk, you can consider investing partially in through SIP.

 

2. Liquidity Risk – NATIONAL SAVINGS CERTIFICATE (NSC) can only be liquidated after 5 years. In case, someone needs to liquidate it before maturity, they may not be able to do so. Hence, anyone looking forward to liquidating their investment before maturity should consider investing in debt mutual funds or liquid funds.

 

 

TAXATION (BENEFITS, TAX EFFICIENCY AND TDS)

Amount invested in purchasing NATIONAL SAVINGS CERTIFICATE (NSC) provides tax benefits up to Rs. 1,50,000/- under section 80C.

However, the interest earned on NSCs features a different tax treatment. The interest earned annually from NSC (in the first four years) is deemed to be reinvested hence exempted from tax and also eligible as a further deduction under section 80C (subject to the overall annual limit of Rs. 1,50,000/-).

However, the interest earned in the 5th year is not re-invested hence earnings are treated as “Income from other sources” and taxed as per the applicable slab of the investor.

Also, the interest received on maturity is however not subject to TDS deduction.

 

 

DOES ANY OTHER PRODUCT OFFER BETTER PROSPECTS THAN NATIONAL SAVINGS CERTIFICATE (NSC)?

NATIONAL SAVINGS CERTIFICATE (NSC) can be beaten by the following products on various grounds.

1. From a safety point of view – NATIONAL SAVINGS CERTIFICATE (NSC) is supreme and is considered to be the safest than any other debt-oriented instrument as the returns it generates are fixed and there is no risk of principal loss as well since it is backed by the government.

 

2. From the returns point of view – Balanced funds generate better returns than NSC as they also participate in the equity market.

Equity mutual funds, on the other hand, generate even better returns in the long run however, it carries a higher risk of principal loss as they invest directly in the stocks of various companies.

If someone has an even higher risk appetite is looking for even better returns then they can invest in stocks or IPOs of various companies.

 

3. From a liquidity point of view – NSC involves a pre-defined maturity period and it cannot be broken prematurely. Hence, someone who is expecting any major expense soon can consider investing in liquid funds or ultra short term funds which not only generates better post-tax returns but also offer higher liquidity.

 

 

HOW TO INVEST AND DOCUMENTS NEEDED?

The process of investing is also as simple as this scheme itself.

• An applicant needs to submit a duly filled and signed form to their nearest post office or designated bank.

• Along with the form, attach your self-attested “Know your customer” documents that include your photo, pan card and any government-issued document containing your present address like passport, Aadhaar card, voter ID card etc.

• Then make a deposit by cheque or pay order. Once the cheque is cleared, the certificate will be issued in favour of the applicant.