All you wanted to know about National Savings Certificates

Choice

Earlier there was a single instrument that was available for investors and this was a 6 year National Savings Certificate. The key for the instrument was that there was an accumulation of the earnings over the life of the instrument so that there was no payout that was available. This meant that the entire money including the earnings came to the investor only at the time of maturity of the instrument. The money was compounding on a half yearly basis. This is different from most bonds and fixed deposits that offer a cash payout as well as a cumulative option as here there is no option for taking a cash payout.

This has now changed so that now there are a couple of offerings on the NSC front. There is a 5 year instrument and there is a 10 year instrument. The interest rate that is currently available on the 5 year instrument is 8.6 per cent and that on the 10 year instrument is 8.9 per cent. Both these instruments have their specific term and they will earn at a different rate of interest that has been set for each of them. This makes the calculations for each of them different and hence the investor has to be alert about this aspect of the investment and they need to take a clear view about their time period of the investment. The other features like the payment of the amount at the time of maturity remains the same as was witnessed earlier. In terms of the time period of investment just a couple of options are available so there cannot be additional option chosen by the investor like they can undertake in a fixed deposit.

Rate of interest

A key part of the entire investment process is the rate of interest that will be earned on the investment and this has been set differently for the two instruments. For the 5 year NSC the interest rate is 8.6 per cent and it is 8.9 per cent for the 10 year instrument. This means that when the calculations for the amount that will be accumulated by the individual are made the figures will depend upon the time when the investment is made as the rate applicable at that time will be earned. Unlike many other instruments where a change in the interest rate is applicable to an existing investment here the rate is locked in at the time of making of the investment. This enables the investor to make a proper calculation of the amount that the individual can accumulate.

Tax benefit

Another aspect of the entire investment process into a NSC is that there is a tax benefit that is available when the investment is made into the instrument. The amount invested is allowed as a deduction under Section 80C of the Income Tax Act and this is part of the overall Rs 1 lakh limit that is present here. At the same time there is an amount that is earned as interest every year and this figure is reinvested because it is not paid out. The amount that is reinvested is also considered as a part of the overall tax deduction and hence this can be added on to the deduction figure which is a good benefit for the investor. The interest earned is however taxable and hence this has to be considered on a yearly basis in the tax workings. In most other instruments the tax benefit is available only on the initial amount invested and not the interest earned.

Suitability

This instrument is suitable for all those who want to keep their money away for a slightly longer time period and want this figure to compound. This is also meant for those who do not want to access their investments and hence are comfortable with the fact that the investment can be allowed to grow over a period of time.  Now with the longer version of 10 years also available the time horizon for the investment has also widened.