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Monday, February 6, 2012

Year end Tax planning part 2- NSC

NSC or National Saving Certificates are post –office saving schemes and the investment up to Rs. 1,00,000 in NSC qualifies for the deduction under section 80 C.
There are 2 series of NSCs-
(1)VIII series- This series has a lock-in period of 5 years (previously 6 years).  Rs. 100 invested becomes Rs. 150.9 after 5 years.
(2) IX series- This series comes with a lock-in period of 10 years. Rs. 100 invested becomes Rs. 234.35 after 10 years.
Salient Features
·         Individual buying for himself or on behalf of a minor, HUF (Hindu Undivided Family) and trusts can invest in it.
·         NSC can be purchased in single or joint names
·         No maximum investment limit
·         Benefits of the section 80 C of the IT act
·         No TDS is deducted on the interest
·         NSC certificates are available in the denomination of RS. 100, Rs,500, Rs. 1000,Rs. 5,000 and Rs. 10,000
·         Calculation of the interest is based on the interest accrual basis. This means, though interest is payable at the time of maturity still investor needs to pay the income tax on its accrual.

Why to go for NSC when Tax saving FDs offer more returns?
As on date, many banks are offering tax saving FDs with a coupon rate of 9.25 % per annum (9.75 % for senior citizens) with quarterly compounding facility, while both the NSC series give sub-9 per cent annual returns.

So a simple question is asked by the investors – “why to go for NSCs?”
1.       The major reason is- NSC certificates can be kept as collateral to get loan from banks while the same is not allowed in case of ‘Tax Saving FDs’.
2.       This facility is very useful for businessmen who don’t want to tie-up their capital. By taking loans against NSCs they get the capital for their businesses along with saving the income tax.
3.       Since the early years of this decade Indian government discontinued the pension in government jobs (barring army and a few others).  
But a person can create his own pension by regularly investing in NSCs.

Suppose Mr. Mishra, who is a government employee but not entitled for the pension.
If from the age of 30, Mr. Mishra starts investing  in NSC IX series  certificates (of the denomination of Rs. 10,000) every  month , then by the age of 40 he shall be getting  Rs. 23,435 per month (the maturity value of Rs. 10,000 denomination NSC certificate which he bought 10 years ago).
And this is nothing but the simulation of the pension.
But one thing should be noted, in a year Mr. Mishra is investing Rs. 1,20,000 in NSC certificates (10,000X12) but as per present IT rules under section 80 C maximum deduction  allowed is Rs. 1,00,000 only.
Despite having invested Rs. 1,20,000 in the NSC certificate, Mrs. Mishra shall get the deduction of RS. 1,00,000 only.
If his income is Rs. 5,00,000 per annum  then tax shall be calculated on  Rs. 4,00,000 only ( Rs. 5,00,000- Rs. 100,000 invested in NSC).

There are more sections to save the income tax (apart from the section 80 C), I shall discuss those in forthcoming posts.


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