National Saving Certificate (NSC): How income tax on interest is calculated

  • National Saving Certificate (NSC): Either you can show the interest as your income every year on accrual basis or offer the same for tax in the year of receipt. 

I have invested 5 lakh rupees in National Saving Certificate in August 2021. I understand that I can claim 80 C exemption upto 1.5 lakh for FY 2021-2022.  I want to understand about tax treatment of interest in coming years?  Will I have to pay tax on entire interest amount on maturity.

Yes, you can claim deduction for investments made in National Saving Certificates under Section 80 C up to Rs. 1.50 lakh in a year along with other eligible items like life insurance premium, provident fund and PPF contribution, ELSS, NSC, repayment of principal of home loan etc.

The interest accrued year after year on National Saving Certificates is fully taxable. For tax purposes you have two options in respect of any interest income including interest on NSC

Either you can show the interest as your income every year on accrual basis or offer the same for tax in the year of receipt.  The interest accrued during all the years except the year of encashment is deemed to have been reinvested and is therefore eligible for deduction under Section 80C in these years. 

So in case you offer it for tax on accrual basis but at the same time you get the deduction for the same under Section 80C thus effectively making the interest tax free in your hands for all the years except the year in which the NSC are encashed. 

If you opt to offer the interest for tax on receipt basis your tax liability may suddenly jump in the year of maturity so it is advisable to offer the same on accrual basis every year.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter
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