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Tax treatment of investment in NSC certificates

National saving certificates are issued by  department of post. It is very safe way of investment. It does not give you safety from inflation but when inflation rate is lower than interest rate, it can give you benefit. It also helps you to save tax . 
Who can buy NSC?
Only residential individual can buy NSC. Joint account is also available.
NSC can be purchased for minimum Rs. 100.The investment can be for denomination  of Rs. 100, Rs. 500, Rs. 1000 and Rs. 5000.
Tax treatment:

  1. Deduction u/s 80C is available for invested amount. 
  2. When interest is accrued to NSC, deduction u/s 80C is available for it also. You should show the interest in NSC in the income tax head – income from other sources and claim deduction u/s 80C. But the total deduction for invested amount and interest accrued should not be more than Rs. 1,00,000 because The maximum deduction allowed u/s 80C is Rs. 1,00,000. So if you have invested Rs. 1,00,000 in NSC, whole interest accrued is taxable.
  3. When the term of NSC ends, you will get principal amount with interest. At that time, principal amount is not taxable because it is your capital which is returned to you. But interest amount will be taxable.

year
NSC purchased
Other investment u/s 80C
Interest accrued
Maturity of NSC with interest
Deduction u/s 80C
Taxable amount
2011-12
80,000
0
5000
85000
0
2012-13
0
0
6000
6000
0
2013-14
90,000
0
7000+
7000
1,00,000
4000
2014-15
0
20,000
8000+
8000
36000
0
2015-16
0
20,000
9000+
9000
115000
(80,000+
35000)
29000
(20,000+
9000)
9000
2016-17
80,000
30,000
10,000+
5000
0
1,00,000
5,000

Explanation:
In year 2011-12, NSC purchase is 80,000 and interest accrued is Rs. 5,000. So the assessee can claim Rs. 80,000 as investment in NSC u/s 80C. He can also claim interest u/s 80C after showing it in income from other sources head.
In year 2012-13, There is no further investment in NSC but interest of Rs. 6,000 is accrued on NSC. The assessee can claim deduction again NSC interest u/s 80C.
In year 2013-14, The assessee further invests in NSC. The interest is accrued for two different NSC worth Rs. 14,000. The assessee can claim deduction u/s 80C up to Rs. 1,00,000. But the total amount of NSC purchased and interest is Rs. 1,04,000.So he has to pay tax for Rs. 4,000 of interest.
In year 2014-15, the interest on NSC accrued is 14,000. Asses see also invests in other schemes under section 80C for Rs. 20,000. So he claims total deduction u/s 80C for Rs. 34,000.
In year 2015-16, the assessee receives the first  NSC money with interest worth Rs. 1,15,000, the principal amount is not taxable but the assessee has to pay tax on Rs. 9000 the interest accrued on last year of NSC.The interest amount on second NSC worth Rs. 9,000 is eligible for claiming deduction u/s 80C.
In year 2016-17, the assessee invests in third NSC. He also invests in other investment qualified for deduction u/s 80C worth. The interest accrued on NSC is total Rs.15,000 for both the NSC. Assessee can claim deduction u/s 80C up to Rs. 1,00,000. So Rs. 5,000 is taxable. It is obvious that from other investment, the assessee should choose NSC interest because if he does not choose, it will be taxable.
Note: The interest amount is not exact calculated figure, it is estimated figure for explanation.
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